2.4 Circular Flow & Labor Markets

The Product Market-

The “place” where goods and services produced by businesses are sold to households.

The Resource (Factor) Market-

The “place” where resources (land, labor, capital, and entrepreneurship) are sold to businesses.

Do individuals supply or demand?

Both, they demand products and supply resources

Do Businesses supply or demand?

Both, they supply products and demand resources

Who demands in the product markets?

Individuals and the government

Who Supplies in the product markets?

Businesses

What is Demand for Labor?

different quantities of workers that businesses are willing and able to hire at different wages.

Is the relationship between between wage and quantity of labor demanded Inverse or direct?

Inverse 

What’s Supply for Labor

different quantities of individuals that are willing and able to sell their labor at different wages.

Is the relationship between wage and quantity of labor supplied Inverse or direct?

Direct

Equilibrium

Wage (the price of labor) is set by the market.

EX: Supply and Demand for Carpenters

What shifts the demand for labor?

1. Price of the output

2. Productivity of the worker

3. Change in the price of other resources

What shifts the supply of labor?

1. Education and training

2. Availability of alternative options

3. Immigration and mobility of workers

4. Cultural expectations

5. Working conditions

6. Preferences for leisure