FREE IGNOU BECC-133 SOLVED ASSIGNMENT 2023-24

3. Derive the labour demand and labour supply curves. Explain the relationship of labour with output in the short run as per classical view.

In the classical economic view, the relationship between labor and output is often discussed in the context of the labor market. The labor market is characterized by the interaction between labor demand and labor supply, which determines the equilibrium wage rate and the level of employment. Let’s derive the labor demand and labor supply curves and discuss their relationship with output in the short run according to the classical view.

Labor Demand Curve: The labor demand curve represents the relationship between the quantity of labor demanded by firms and the wage rate. In the classical view, firms maximize their profits by hiring labor up to the point where the marginal cost of labor (the wage rate) is equal to the marginal revenue product of labor (the additional output generated by hiring an additional unit of labor).

Mathematically, this can be represented as:

Marginal Cost of Labor (Wage Rate) = Marginal Revenue Product of Labor

In the short run, other factors of production are typically fixed, so changes in labor can directly impact output. The labor demand curve slopes downward because as the wage rate increases, firms are willing to hire fewer workers since each additional worker becomes relatively more expensive.

Labor Supply Curve: The labor supply curve represents the relationship between the quantity of labor supplied by individuals and the wage rate. In the classical view, individuals are assumed to be rational and seek to maximize their utility, which is influenced by both leisure and income. As the wage rate increases, the opportunity cost of leisure rises, leading individuals to supply more labor to the market.

In the short run, the labor supply curve can be upward-sloping due to the income effect outweighing the substitution effect. As wages increase, individuals may choose to work more hours to earn higher income, even if this means sacrificing some leisure time.

Equilibrium and Output: In the classical view, the equilibrium wage rate and level of employment are determined by the intersection of the labor demand and labor supply curves. At this equilibrium point, the wage rate is such that the quantity of labor demanded by firms equals the quantity of labor supplied by individuals.

In terms of output, the classical view suggests that changes in the quantity of labor employed will lead to proportional changes in output, assuming that other factors of production are constant. This is because the classical economists, such as Adam Smith and David Ricardo, believed in the concept of the “law of diminishing returns.” According to this law, as more units of a variable input (labor) are added to a fixed amount of other inputs (capital, land), the marginal output produced by each additional unit of labor will eventually diminish.

In summary, according to the classical view, the labor demand and labor supply curves intersect to determine the equilibrium wage rate and employment level. Changes in labor are assumed to lead to proportional changes in output in the short run due to the law of diminishing returns.

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