Why is there a shift in the supply curve when workers' wages rise?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

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.

jameadows's profile pic

jameadows | High School Teacher | (Level 1) Educator Emeritus

Posted on

When workers' wages rise, the supply curve shifts to the left. This means that at a certain price level, the rising cost of inputs into the goods (including wages) will cause less of that good to be produced. Inputs are the resources necessary to produce the good, including workers' wages. The curve shifts to the left because there is less opportunity to make a profit from that good. If the cost of other inputs, such as the cost of energy, rises, it will have a similar effect on the supply curve.

For example, if the wages of workers at a fast food chain increase and the cost of a hamburger stays the same, the cost of making each hamburger will increase. Therefore, fewer hamburgers will be produced at that price level because each hamburger will result in less profit, and the supply curve will shift to the left. 

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

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.