labor market/goods and services

when the labor market operates at an equilibrium

The market only experiences voluntary unemployment

Goveernment doesn’t really have to do anything to intervene

Labor demand

Is a derived demand based on the demand for the goods and services that labor produces.

As the demand for products increases, the demand for labor also increases.

If labor demand decreases and wages stays the same,

There is a surplus of workers leading to involuntary unemployment.

Suppliers/Demanders of labor market

Supplier = people

Demanders = firms

Goods and Services

Flexible price level model (supply and demand)

• price is a variable on the graph

• more useful over longer periods of time

Fixed-price model

• P is not a variable on the axis of the graph 

• Changes in P cause a shift in the supply and demand curves.

• More useful in thee short run 

Full employment

Occurs when the only unemployment is voluntary 

If equilibrium is greater than potential GDP

Inflationary gap occurs

The economy is producing above its sustainable capacity, leading to upward pressure on prices.

If equilibrium is less than potential GDP

A recessionary gap occurs

The economy is producing below its sustainable capacity, which can lead to rising unemployment.