Question

1. In the midst of Covid-19 pandemic, firms cut production due to lockdown.

1. How will firms’ cutting of production affect employment? Explain you answer using an appropriate diagram.
2. Suppose firms do not want to lay off workers, explain how firms decision may affect employment and wages in the labour market. Explain labour market using an appropriate diagram.   

Answer 1

a)

The lockdown has caused the fall in the aggregate demand in the economy, so here the fall in the aggregate demand has forced the firms to reduce the output level.

The fall in the output level has driven up the unemployment rate in the economy.

Following is the diagram:

in the above diagram, the aggregate demand has shifted to left thereby the income level has declined to the y.

B)

The fall in the aggregate demand would drive down the demand for labour. Thus in order to keep the labour employed, the wage rate must go down.

Following is the diagram:

iin the above diagram, the demand for labour shifts down but flexible wage rate keep the labour full employed.