Question

Draw two graphs and show unemployment on each and answer a question: 1. regular labor supply...

Draw two graphs and show unemployment on each and answer a question:

1. regular labor supply and elastic labor demand.

2. regular labor supply and inelastic labor demand.

3. where is unemployment larger?

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Answer #1

Answer;

The left graph aboove indicates elastic labor demand, and the right graph indicates inelastic labor demand. The change in wage rate (y-axis) is the same in both the graphs.

The difference between L1 and L2 is the unemployment. As we see in the graph, unemployment is higher in a market with elastic labor demand.

This is because when labor demand is inelastic, employers or producers will have demand for labor no matter how high the wage rate. Labor demand will only marginally decline. On the other hand, elastic labor demand means that labor is not indispensable for producers. They will do away with labor.

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