The interrelationship among markets is vitally important. A change in one market will also lead to changes in other markets. Understanding these links is important. This series of posts addresses the important link between the labor and product markets.
The production process generally involves (a) purchasing resources- like raw materials, labor services, tools, and machines; (b) transforming these resources into products (goods and services); and (c) selling the goods and services in a product market. Production is generally undertaken by business firms. Typically, business firms will demand resources, while households will supply them. Firms demand resources because they contribute to the production of goods and services. In turn, households supply them in order to earn income.
Just as in product markets, the demand curve in a resource market i s typically downward-sloping and the supply curve upward-sloping. An inverse relationship will exist between the amount of a resource demanded and its price because businesses will substitute away from a resource as its price rises. In contrast, there will be a direct relationship between the amount of a resource supplied and its price because a higher price will make that resource more attractive to provide. As in product markets, prices will coordinate the choices of buyers and sellers in resource markets, bringing the quantity demanded into balance with the quantity supplied.
The labor market is a large component of the broader resource market. Actually, there is not just one market for labor, but rather there are many labor markets, one for each different skill-experience-occupational category. Let’s look at the labor market for low-skilled, inexperienced workers. The supply of young, inexperienced workers has declined in recent years in many areas of the United States. This lower supply has pushed the wages of young workers upward. The higher price of this resource increases the opportunity cost of goods and services that young workers help produce. In turn, the higher cost reduces the supply (shifting S, to S,) of products like hamburgers at McDonald’s and other fast-food restaurants, pushing their price upward. When the price of a resource increases, it will lead to higher production costs, lower supply, and higher prices for the goods and services produced with the resource.
Of course, lower resource prices have the opposite effect. Lower resource prices reduce costs and expand the supply of consumer goods made with the lower-priced resources (shifting the supply curve to the right). The increase in supply will lead to a lower price in the product market. Thus, when the price of a resource- such as labor- changes, the prices of goods and sevices produced with that resource will change in the same direction.
Changes in product markets will also influence resource markets. There is a close relationship between the demand for products and the demand for the resources required for their production. An increase in demand for a consumer good- automobiles, for example- will lead to higher auto prices, which will increase the profitability of producing automobiles and give automakers an incentive to expand output. But the expansion In automobile output will require additional resources, causing an increase in the demand for. and prices of, the resources required for their production (steel, rubber, plastics, and the labor services of autoworkers, for example). The higher prices of these resources will cause other industries to conserve on their use, freeing them up for more automobile production.
Of course, the process will work in reverse if demand for a product falls. A decrease In demand will not only reduce the price of the product but will also reduce the demand for and prices of the resources used to produce it. Thus, when the demand for a product changes, the demand for (and prices Of the resources used to produce it will change in the same direction.
Tags: household, product markets, resource