Economics Supply and Demand

Identify the factors that influence supply and demand of labour and assess the effectiveness of unemployment on the Australian economy.

The labour market is a crucial part of the market economy. It involves the interaction between individuals seeking employment to earn income and employers who want to obtain the most appropriate labour skills for their production processes. If a labour market does not function well it will significantly constrain the economys ability to grow. Labour is critical for businesses to operate, and for individuals to find work and stable income. In reality an economy does not have a single labour market. Instead there are many distinct labour markets- a labour market for each individual firm and industry, as well as a labour market for each occupation in the economy. Similarly there is no single price for labour. Instead each individual labour market will have its own labour market outcomes, both in terms of wage levels and employment opportunities. Conditions in one labour market may vary significantly from conditions in another. This explains why there may be a shortage of workers with specific skills that are high in demand, such as mining engineers, while the economy overall still has many unemployed people.

Firms demand labour by offering wages, just like consumers demand goods and services in market by offering to pay a price. However the demand for labour defers from consumer demand for goods and services because the demand for labour is a derived demand. The demand for labour is derived from the demand for goods and services within the economy. When consumers demand higher levels of goods and services firms are forced to increase their level of output to meet the higher demand. This means that firms must hire more labour to help with the higher production levels increasing labour market. In other words labour is demanded only because it is needed from the firm to produce goods and services and make a profit. The demand curve or labour is downward sloping meaning as price of labour falls an individual firm will employ more labour.

When economic conditions for the whole economy are buoyant, a firm is more likely to enjoy higher sales and will therefore need more employees. In general terms, higher rates of economic growth are associated with falling unemployment levels and vice versa. Therefore changes in demand for labour will occur as a result of fluctuations in the business cycle. Only a few firms would benefit from a economic downturn and actually employ more people in bad economic conditions.

As a result of labour being a derived demand any changes in the pattern of consumer demand will obviously affect the pattern of demand for labour. Therefore a change in consumer tastes and preferences for different goods and services will see a change in the allocation of labour between different industries. The demand for labour will increase in industries that see an increase in demand for their products, and decrease in those experiencing lower consumer demand. A firms output is ultimately determined in effectiveness in selling its goods and services in the marketplace. This is determined by factors such as quality of its products, its customer service and its marketing efforts. Even in a situation where there is an overall decline in the demand in an industry in which a firm operates, it is still possible for that firm to achieve growth in output if it can increase its market share.

Apart from determining its overall level of output a firm must also determine how it will organise its production. This will often involve choice between using labour more intensively in production or relying more heavily on technology and automated processes. The productivity of labour and overall labour cost, in comparison to the cost of other inputs such as capital will determine