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Comparative Analysis Of The Labour Market And Product Market

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The labour market is concerned about the demand and supply of a factor of production (in this case labour) while the product market is the market where the demand and supply of goods are determined. The demand for labour is a derived demand which is merely demanded because of what it will help produce (ie: the output of the company demands labour), while the demand for goods are not a derived demand. This is the first difference between the goods (product) market and the labour market. Second, the supply of products in the product markets depends on factors such as the cost of production, the level of technology of the company, etc., while the supply of labour in the labour market depends on the wage paid and other non-economic aspects of labour.

The value of the marginal product curve for labour is also the demand for labour curve in a perfectly competitive labour market is because of the issue of diminishing marginal returns. The law of diminishing marginal returns with respect to labour is the state where the marginal output from the extra unit of labour employed. Due to the fact that the demand for labour is a derived demand (meaning that it depends on the product that the labour helps to make), the optimal amount of labour can be used at the point where the marginal cost of labour (wage rate) equals the marginal revenue product of labour. An employer of labour will employ a given amount of labour provided that the marginal revenue product exceeds the wage rate. When the marginal revenue product exceeds the wage rate, the employer of labour in the perfectly competitive market will want to employ more. The additional extra unit of labour will lowers the marginal product revenue, which will lead to low amount of labour to be demanded. The fall in the marginal revenue continues where an extra unit of labour is added (provided that everything else is held constant). This negative relationship between the quantity of labour used and the marginal revenue product makes the marginal revenue product curve to be negatively sloped.

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For the factors which shift the demand for labour

Changes in the demand for the product that labour helps to produce. This can influence the demand for labour because the demand for labour is a derived demand. For example, the quantity of labour demanded depends on the demand for the product it helps to produce. Therefore, a decrease in the demand for the product that labour helps produce will shift the demand curve downwards reducing demand for labour and vice versa.

Change in the number of firms employing the labour. An increase in the number of firms that employ the same labour will lead to an increase in the demand for the labour shifting the labour curve upwards and to then right. While a decrease in the number of firms that employs the labour leads to a decrease in demand for the labour shifting the demand downwards.

For the factors which shift the supply for labour

Barriers to entry: Artificial limits to the supply of labour in a market such as medical licenses for medical practitioners and other licensing requirements reduces the supply of labour and shifts the supply of labour to the left. A loosening of licensing requirements will have the opposite effect shifting the supply to the right.

The real wage on offer in substitute jobs: An increase in the real wage in a substitute job which employs the same labour can lead to people moving the substitute jobs shifting the supply of labour in the industry to the left and vice versa.

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