Economic Fluctuations © 2003 South-Western/Thomson Learning Can the Classical Model Explain Economic Fluctuations? Shifts in Labor Demand Shifts in Labor Supply Shifts in Labor Demand Shifts in labor demand not very large from year to year
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© 2003 South-Western/Thomson Learning
A situation in which a market does not clear - quantity supplied is not equal to quantity demanded.
At every point along the labor supply curve, the wage rate tells us the opportunity cost of working for the last worker to enter the labor force.
At every point along the labor demand curve, the wage rate tells us the benefit obtained by some firm from the last worker hired.
At the equilibrium level of employment, all opportunities for mutually beneficial trade in the labor market have been exploited.
During a recession, the labor market is in disequilibrium, and the benefit from hiring another worker exceeds the opportunity cost to that worker.
In the short run, we need to look carefully at the problems of coordinating production, trade, and consumption in an economy with hundreds of millions of people and tens of millions of businesses.
Over time, firms that have experienced an increase in demand will return to normal utilization rates, and employment will fall back to its normal, full-employment level.
Over time, firms that have experienced a decrease in demand will return to normal utilization rates, and employment will rise back to its normal, full-employment level.
Job-searching behavior by firms and workers is just one explanation for the slow pace of adjustment back to full employment.