This document discusses aggregate supply and the supply and demand functions of labor. It defines aggregate supply as the total supply of goods and services firms plan to sell in an economy at a given price level. The key components of aggregate supply are private consumer goods, capital goods, public/merit goods, and traded goods. The aggregate supply curve shows a positive relationship between price level and quantity supplied in the short run. The marginal product of labor determines the optimal number of workers for a firm. The labor demand curve shows the quantity of labor demanded at different wage rates based on profit maximization. Shifts in output price or technology can change labor demand. The labor supply curve slopes upward initially but may bend backward at higher wage rates due to

1. AGGREGATE SUPPLY AND DEMAND
FUNCTION AND SUPPLY FUNCTION OF
LABOUR

2. AGGREGATE SUPPLY
In economics, aggregate supply (AS) or domestic final
supply (DFS) is the total supply of goods and services
that firms in a national economy plan on selling during a
specific time period. It is the total amount of goods and
services that firms are willing and able to sell at a given
price level in an economy.

3. COMPONENTS OF AGGREGATE SUPPLY
Consumer goods
Private consumer goods and services, such as motor vehicles,
computers, clothes and entertainment, are supplied by the
private sector, and consumed by households. For a developed
economy, this is the single largest component of aggregate
supply.
Capital goods
Capital goods, such as machinery, equipment, and plant, are
supplied to other firms. These investment goods are significant
in that their use adds to capacity, and increases the economy’s
ability to supply private consumer goods in the future.

4. Public and merit goods
Goods and services produced by private firms for use by
central or local government, such as education and
healthcare are also a significant component of aggregate
supply. Many private firms such as those in construction, IT
and pharmaceuticals, rely on contracts to supply to the
public sector.
Traded goods
Goods and services for export, such as chemicals, entertainment,
and financial services are also a key component of aggregate
supply.

5. The Aggregate Supply curve
The simple law of supply suggests that firms will, in general, plan
to produce more output at higher price levels. At higher price
levels across the economy firms expect that they can sell
their final products at higher prices, and there will be a
positive relationship between the price level and aggregate
supply.

6. CONTINUED..
Any increase in input prices (costs) which may follow is
assumed to lag behind increases in the general price level.
Because of this firms expect that they will benefit - at least
in the short run - from a rise in the price level.

7. DEFINITION OF MPL
Labor or labor force is the number of workers at a
producers facility , these laborers utilise capital resources
to produce a product as without labor producers cannot
produce. But the question generally arises that how
much labor is required. Producers must determine the
most efficient number of workers to meet their product
need. This is thus determined by analyzing the marginal
product of labour . This is the amount of change in
production produced by each additional worker . The
change can thus take three different forms:-
 PHASE I
 PHASE II
 PHASE II

8. PHASE I [INCREASING MARGINAL RETURNS]
 When a producer decides to higher an additional unit of
worker as a result the number of items produced per worker
per unit increases.
 The producer is thus enjoying increasing returns.
 This is because as the production has become more
efficient as each work specializes in a production task &
makes effective use of producers capital resources.

9. PHASE II[DIMNISHING MARGINAL RETURNS]
• If a producer continues to add a worker the total amount of
production may continue to increase but the per worker
production per unit of time will decrease . This is refered to as
DIMNISHING MARGINAL RETURNS .
• As each worker is competing for the use of the available
resources as resources are limited , therefore efficiency
decreases as more worker utilize them.

10. PHASE III[ NEGATIVE MARGINAL RETURNS]
• Eventually if a producer hiers enough additional workers
production can actually decrease. This is known as NEGATIVE
RETURN.
• This occurs when the number of workers trying to utilize the
available resources actually disrupts the production process &
severly impacts production process.

11. DEMAND FUNCTION OF LABOUR
In economics labor demand refers to the number of hours
of hiring that employer who is willing to work with respect to
several extraneous variable, that are the wage rate , the
unit cost of capital and the market determined selling price
of his output.
Thus the function specifying the qty of labour
that would be demanded at any of various possible values
of these exogenous variables is called as the labour
demand function.

12. DEMAND FUNCTION OF A COMPETITIVE FIRM
 It can thus be determined in a competitive firm is through
profit maximisation problem.
 Where:- P= Extraneous selling price of the output being
produced.
Q= Qty of the output being produced
in a month
W= Hourly wage rate paid to the worker
L= Number of workers hired(qty of labour
demanded per month)
R= Rate of rent & cost of capital using a machine for
an hour
k= Number of hours machine is being used

13. Continued…
• Which specifies the amount of output that can be produced
using any of various combination of labour and capital.
Thus this optimization problem involves simultaneous
involvement of labour and capital in resultant output.

14. IF THE FIRM IS MONOPOLIST
• If the firm is monopolist, its optimization problem is different
because it cannot take its selling price as given: the more it
produces, the lower will be the price it can obtain for each
unit of output, according to the market the demand curve for
the product. So its profit-maximization problem
where Q(p) is the market demand function for the product.
The constraint equates the amount that can be sold to the
amount produced. Here labor demand, capital demand, and
the selling price are the choice variables, giving rise to the
input demand functions and the pricing functions. There is
no output supply for a monopolist firm, because the supply
function pre supposes the existence of exogeneous variables.

15. REASONS FOR SHIFT IN DEMAND CURVE OF
LABOUR
• Causes of shifts in labor demand curve
• The labor demand curve shows the value of the marginal
product of labor
• as a function of quantity of labor hired. Using this fact, it can
be seen that the
• following changes shift the labor demand curve:
• The output price. When output price rises, the labor demand
curve shifts
• to the right { more labor is demanded at each wage. When
output price falls,
• less labor is demanded at each wage.
• Technological change causes the MPL function to change,

16. DEMAND CURVE
• The labor demand curve shows shows the value of the
marginal product of labor as a function of quantity of labor
hired. Using this fact, it can be seen that the following
changes shift the labor demand curve: ... When output price
rises, the labor demand curve shifts to the right – more
labor is demanded at each wage rate

17. Supply Function of Labour
• The labour supply is the total hours (adjusted
for intensity of effort) that workers wish to
work at a given real wage rate. It is frequently
represented graphically by a labour supply
curve, which shows hypothetical wage rates
plotted vertically and the amount of labour
that an individual or group of individuals is
willing to supply at that wage rate plotted
horizontally.

18. ASSUMPTIONS
• Workers choose their hours.
• There are no contractual obligations to work a
certain number of hours.
• Workers are utility-maximising agents.
• Work provides a disutility, which must be
compensated for by paying wages.
• Unpaid leisure time is a "normal” goods
• The labour market is competitive, and both firms
and workers are price-takers.

20. Why does the labour supply curve
bend backward?
The backward-bending labor supply curve. This
supply curve shows how the change in real
wage rates affects the amount of hours worked
by employees. Referring to the graph, if real
wages were to increase from W1 to W2 then the
worker will obtain a greater utility, due to their
higher income.

21. Why does the labour supply curve
slope up?
• If the substitution effect is stronger than the
income effect then the labour supply curve
will be upward sloping; if beyond a certain
wage rate the income effect is stronger than
the substitution effect, then the labour supply
curve is backward bending.

22. INVERTED ‘S’ SHAPE SUPPLY CURVE
At very low wage levels, near the
subsistence level, the supply curve may
also be curved backwards for a completely
different reason. That effect creates an
"inverted S" or "backward S" shape for
different reasons.

23. REASONS ARE:
1.)Because families face some minimum
level of income needed to meet their
subsistence requirements, lowering wages
increases the amount of labour-time
offered for sale.

24. 2.) A rise in wages can cause a decrease in
the amount of labour-time offered for sale,
and individuals take advantage of the
higher wage to spend time on needed self-
or family-maintenance activities.