FIGURE 14- 6
-Refer to Figure 14- 6.The market begins in equilibrium with the curves labelled Demand and Supply.If a labour union negotiates the wage to W2 in an otherwise competitive labour market,

Question

FIGURE 14- 6 
-Refer to Figure 14- 6.The market begins in equilibrium with the curves labelled Demand and Supply.If a labour union negotiates the wage to W2 in an otherwise competitive labour market,

Quizplus · Accepted Answer

When the labour union negotiates a wage of W2, the cost of hiring workers increases for employers. As a result, the quantity of labour demanded decreases from L1 to L2. This is because employers will only hire workers if the additional cost of employing them (i.e. the wage rate) is less than or equal to the additional revenue generated by their work. In this case, at the higher wage rate of W2, employers will find it less profitable to hire as many workers as they would at the lower wage rate of W1. Therefore, the equilibrium quantity of labour hired falls from L1 to L2. The equilibrium wage rate remains at W2, where the quantity of labour demanded equals the quantity of labour supplied. The supply curve remains the same, as the number of workers willing and able to work has not changed. The demand curve does not shift, as the negotiations with the labour union do not affect the underlying demand for labour in the market.