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WHY WHEN WORKERS WAGES RISE THERE IS A SHIFT IN THE SUPPLY CURVE?
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I hope your book says that the curve shifts to the left...
Remember that supply is defined as how much a supplier will produce AT A GIVEN PRICE (price being how much they can sell their good for).
Supply goes down as the cost of producing the product goes up. This makes sense because let's say you can sell a t-shirt for $5. If you only have to pay your workers $.50 cents for each shirt, you make a lot of profit and you want to make a lot of shirts. But now let's say your workers somehow make you pay them $5 per shirt. Now there's no profit and you don't want to make so many shirts.
So the thing is, as the cost of your inputs (including workers) go up, your profit goes down (if you are still selling the product at the same price). If your profit goes down, you want to make fewer products (and you try to find something else to make that's more profitable). That means supply goes down and the curve moves left.
Posted by pohnpei397 on November 11, 2009 at 10:07 AM (Answer #1)
Let us state clearly the situation. We are saying that when rate of wages paid to the workers for producing a good increases, curve of quantities offered for supply by all the suppliers in the market at different market price will shift.
This happens because rise in wages increase the marginal cost of production. For the same price the firms now gets lower profit and therefore some of the firms will no longer find the market profitable enough and decide to withdraw from the market. Thus the total quantity offered for supply by all the suppliers in the market at different prices will reduce. In other words the supply curve will shift to the right.
This analysis is valid only for a perfectly competitive market. In monopolistic market the exact response of an individual firm to increase in cost is determined by factors like demand elasticity. For example, when the demand faced by it is perfectly elastic the firm may choose to reduce its price and continue to supply the same quantity rather than insist on higher prices and end up with no demand at all.
Posted by krishna-agrawala on November 11, 2009 at 10:17 PM (Answer #2)
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