An economic model is a theoretical concept that represents a process by a number of variables and a set of quantitative or logical relationships between them to determine what might happen in different scenarios or at a future date. This model is what an economist uses to make a number of simplified assumptions and then sees how different scenarios might play out.
Before explaining the effect of supply and demand on the variable market, let us explain in brief the trend in the labor market:
The Marginal Product of Labor (MPL) is decreasing. Firms are price -takers in the goods market(i.e. cannot affect the price of output) as well as in the labor market (i.e cannot affect the wage rate ). Whereas, the supply of labor is elastic and increases with the wage rate(upward sloping supply) and the firms are profit maximizers.
However, the way the laws of supply and demand affect the prices consumers pay for goods and services, in a similar way they also affect the labor market. The Labor market is a market that represents the relationship between workers and firms in the market place. In the Labor market, firms are buyers and the individuals provide labor supply. Both firms and individuals act as wage takers, but firms must take and pay the rates that the market demands, whereas the workers must accept these wages for the work provided.
EFFECT OF DEMAND IN THE LABOR MARKET
There are various factors which determine the quantity of labor demanded such as the number of labor costs. the quantity of labor required by the firm etc.
In order to maximize profits, the firm wants more workers at lower wages. This causes the demand curve to slope downwards.
EFFECT OF SUPPLY IN THE LABOR MARKET
However, the effect of the supply of labor in the labor market can be explained in the following manner, but before explaining it let us understand the concept of labor supply.
Labor supply refers to the individual workers who are willing to provide their services to the firm at a given wage rate. Supply of labor increases when the workers anticipate higher wages and labor supply decreases when wages are less. So, the supply curve slopes upwards.
LIMITATIONS OF ECONOMIC MODEL OF PAY
There are various limitations of an economy model of pay. Some of them are as follows:-
(i) The data provided must be complete and accurate in order for the analysis to be successful.
(ii) Data once entered should be analyzed correctly.
(iii) Parameters of few may remain constant.
(iv) A number of strategic variables may be tampered by a single one.
(v) Very unlike items may be analyzed in terms of a single category.
(v) Certain sequences may be isolated and evaluated without regard to their associations to other series.
However, there are various factors that determine the market pay level. Some of them are as follows:-
(a) Labor Unions
(b) Personal perception of wage
(c) Cost of living
(d) Government legislation
(e) Ability to pay
(f) Supply and Demand, and