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We assume here that workers have decided to work

2.4 The functioning of the LM: Supply. We assume here that workers have decided to work S L = g (W)  labor supplied given the changes in W Relation (slope) POSITIVE (?) Changes in W  changes upon the curve Markets, firms, individuals

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We assume here that workers have decided to work

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  1. 2.4 The functioning of the LM: Supply We assume here that workers have decided to work SL = g (W)  labor supplied given the changes in W Relation (slope) POSITIVE (?) Changes in W  changes upon the curve Markets, firms, individuals Also, changes in other factors / forces that affect SL (YNOL, work-leisure preferences, interest rate, etc.)  shifts of the curve (ceteris paribus)

  2. 2.4 The functioning of the LM: Supply Market SL curve: positive slope • Higher W larger supply SL curve faced by the firm: horizontal • Firms and individuals are “wage-takers” Individual SL curve: backward-bending • Income effect and substitution effect • Inflection point changes from person to person

  3. 2.4 The functioning of the LM: • Wage determination Graphically: intersection of DL and SL curves Intersection  equilibrium In disequilibrium  the are forces which move us back to eq. • If ES, downward pressure on W • If ED, upward pressure on W Disturbance of equilibrium: other changes other than W can shift the eq.  shifts of curves E.g. DL up and SL down at the same time  W up (construction workers, black death) Adjustments are not usually immediate: training costs, geography, etc.. (employee), search and training (employer). Other: laws, institutions, or customs

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