In our discussion of the economic problem, we have argued that the fundamental economic problem that every society must deal with is the scarcity problem that arises since the needs and wants of society are unlimited while its resources are limited. We have identified these limited resources as land, human resources (which includes labour) and capital.
When we dealt with the circular flow model, we have identified the factor market as an important market where the factors of production – of which labour is one – are bought and sold. In this learning unit, we will take a closer look at this factor market by concentrating on the labour market.
In our discussion of demand and supply and prices, we have concentrated on the goods market and we have explained how the equilibrium price and quantity of a good and service are determined by the interaction of the forces of demand and supply. We have also dealt with the important issue of what happens to the equilibrium price and quantity when the demand and supply change. And, importantly, we have demonstrated how the economic problem of scarcity is addressed through price changes.
Interaction of demand and supply
Impact of an increase in demand
In this learning unit, we will use the principles of demand and supply to analyse the labour market. We will start by looking at the demand for labour and then the supply of labour. This is followed by a discussion of how the demand and supply of labour determines the wage – which is the price of labour. We end the learning unit by considering the impact of a minimum wage on the labour market.