Impact of Higher Wages on Market Equilibrium
TITLE
With the help of a diagram(s), explain what is meant by equilibrium in a market, and consider the extent to which the equilibrium price and equilibrium quantity are likely to change for a product following an increase in the wages for labour across the whole economy.
ESSAY
🌟Title: Understanding Equilibrium in a Market and Effects of Wages Increase on a Product🌟
🌟Introduction🌟
In economics, equilibrium in a market refers to a state where the quantity demanded equals the quantity supplied, leading to price stability and no tendency for change in the market.
🌟Understanding Equilibrium in a Market🌟
Equilibrium is represented by the point where the demand curve intersects with the supply curve, indicating the equilibrium price and quantity. This point reflects a balance between consumer demand and producer supply.
🌟Analysis: Effects of Wages Increase on Equilibrium Price and Quantity🌟
When there is an increase in wages across the economy, it affects both the demand and supply sides of the market.
1. 🌟Demand Side Approach🌟
💥 If the product is a normal good, an increase in wages can lead to an increase in demand due to higher consumer purchasing power. This shifts the demand curve to the right, causing an increase in both equilibrium price and quantity.
💥 In contrast, for an inferior good, where demand decreases as income rises, the demand curve shifts to the left. This results in a decrease in equilibrium price and quantity.
🌟Diagram:🌟
💥 Insert a diagram illustrating the shift in demand curves for both normal and inferior goods.
2. 🌟Evaluation of Changes🌟
💥 The extent of change in equilibrium price and quantity will depend on factors such as the nature of the good, price elasticity of demand, income elasticity of demand, and price elasticity of supply.
💥 For normal goods with elastic demand, the increase in wages may lead to a proportionally larger increase in quantity demanded, causing a significant shift in equilibrium.
💥 On the other hand, for products with inelastic demand, the impact may be less pronounced due to a smaller change in quantity demanded.
🌟Conclusion🌟
In conclusion, an increase in wages across the economy can have varying effects on the equilibrium price and quantity of products, depending on the nature of the goods and the elasticity of demand. Understanding these dynamics is crucial for predicting market outcomes in response to changes in economic factors.
🌟Reference🌟:
💥 Cambridge International AS & A Level Economics Mark Scheme, May/June 2023.
SUBJECT
ECONOMICS
PAPER
A level and AS level
NOTES
🌟Explanation of Equilibrium in a Market:🌟
💥 The equilibrium point is where the quantity demanded equals the quantity supplied.
💥 There is no tendency to change in a market.
💥 Diagram showing the equilibrium price and equilibrium quantity.
🌟Analysis Following Increase in Wages:🌟
💥 The demand curve may shift due to the increase in wages.
💥 If it is an inferior good, the demand curve will shift to the left.
💥 If it is a normal good, the demand curve will shift to the right.
💥 Diagram demonstrating the shift in the demand curve for both normal and inferior goods.
💥 Explanation of the change in equilibrium price and quantity for each type of good.
🌟Evaluation:🌟
💥 The extent of change depends on whether the good is normal or inferior.
💥 Discussion on the extent of change based on the value of various economic indicators.
💥 Justified conclusion on the impact of increased wages on equilibrium price and quantity.