Economics Supply and Demand

Identify the factors that influence supply and demand of labour and assess the effectiveness of unemployment on the Australian economy.

The labour market is a crucial part of the market economy. It involves the interaction between individuals seeking employment to earn income and employers who want to obtain the most appropriate labour skills for their production processes. If a labour market does not function well it will significantly constrain the economy's ability to grow. Labour is critical for businesses to operate, and for individuals to find work and stable income. In reality an economy does not have a single labour market. Instead there are many distinct labour markets- a labour market for each individual firm and industry, as well as a labour market for each occupation in the economy. Similarly there is no single price for labour. Instead each individual labour market will have its own labour market outcomes, both in terms of wage levels and employment opportunities. Conditions in one labour market may vary significantly from conditions in another. This explains why there may be a shortage of workers with specific skills that are high in demand, such as mining engineers, while the economy overall still has many unemployed people.

Firms demand labour by offering wages, just like consumers demand goods and services in market by offering to pay a price. However the demand for labour defers from consumer demand for goods and services because the demand for labour is a derived demand. The demand for labour is derived from the demand for goods and services within the economy. When consumers demand higher levels of goods and services firms are forced to increase their level of output to meet the higher demand. This means that firms must hire more labour to help with the higher production levels increasing labour market. In other words labour is demanded only because it is needed from the firm to produce goods and services and make a profit. The demand...