Explain about labor market in as-ad model, Macroeconomics

Assignment Help:

Q. Explain about Labor Market  in AS-AD model?

In AS-AD model, economy will always be on the response curve - the thick line in chart below. 

1736_Explain about Labor Market  in AS-AD model.png

Figure: The labor in the AS-AD model

Response curve has a horizontal part and a downward sloping part. In IS-LM model, we had only horizontal as real wages where constant. We couldn't move beyond LB

We can illustrate the response curve by examining economy moving from point A to point C. 

  • First, economy is at point A, with prices P, wages W, real wages W/P and amount of labor LA. Profit-maximizing quantity of labor is LBthough firms don't choose this quantity owing to the lack of demand.
  • If aggregate demand increases, L can increase without P being affected up to L = LB. To the left of point B, IS-LM model is completely sufficient and AS-AD model is redundant.
  • When L = LB, L can't increase without real wages falling. In AS-AD model real wages are decreased by an increase in P (with W constant) and we begin to move down demand curve for labor.
  • Between the points B and C, L will increase when P increases.
  • Though we can't increase L above LC. When we are at point C, not even a price increase will help. Real wages are no so low that labor supply sets the limit - there are no more people who want to work for these low real wages.

Related Discussions:- Explain about labor market in as-ad model

Assingment, a complete demend funtion equation

a complete demend funtion equation

Keynesion model, what would be effect of fiscal and monetry policy on price...

what would be effect of fiscal and monetry policy on price and output level if meges are flexible and rigied?

Explain about the circular-flow of economic activities, Explain about the c...

Explain about the circular-flow of economic activities. Circular-Flow of Economic Activities: Economic Agents:    a. Households b. Firms Where they interact:

Effect of a wage increase, Describe the differences between the substitutio...

Describe the differences between the substitution effect of a wage increase and the income effect of a wage increase.

Indirect tax, Discuss whether high indirect taxes are best way to discourag...

Discuss whether high indirect taxes are best way to discourage smoking

Consumer increases her purchases of compact disks, Suppose a consumer's inc...

Suppose a consumer's income increases from $30,000 to $36,000. As a result, the consumer increases her purchases of compact disks (CDs) from 25 CDs to 30 CDs. What is the consumer'

Keynes liquidity Preference theory stipulates that m, #questionKeynes liqui...

#questionKeynes liquidity Preference theory stipulates that money demand is negatively related to current income and positively related to interest rate..

Production possibility curve, PRODUCTION POSSIBILITY CURVE As we have s...

PRODUCTION POSSIBILITY CURVE As we have seen, the essence of economic analysis is the problem of scarcity and choice. We know that limited productive resources compel individua

What is the law of comparative advantage, What is The law of comparative ad...

What is The law of comparative advantage The law of comparative advantage, though, suggests that it would be unwise of UK economy to try to replicate German model. First German

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd