Thursday, April 19, 2012

WHY WHEN WORKERS WAGES RISE THERE IS A SHIFT IN THE SUPPLY CURVE?

I hope your book says that the curve shifts to the left...


Remember that supply is defined as how much a supplier will produce AT A GIVEN PRICE (price being how much they can sell their good for).


Supply goes down as the cost of producing the product goes up.  This makes sense because let's say you can sell a t-shirt for $5.  If you only have to pay your workers $.50 cents for each shirt, you make a lot of profit and you want to make a lot of shirts.  But now let's say your workers somehow make you pay them $5 per shirt.  Now there's no profit and you don't want to make so many shirts.


So the thing is, as the cost of your inputs (including workers) go up, your profit goes down (if you are still selling the product at the same price).  If your profit goes down, you want to make fewer products (and you try to find something else to make that's more profitable).  That means supply goes down and the curve moves left.

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