Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

S
0
Labour
RealWage
s
L
d
L
0
w
1
w
E
F
N
1
d
L
1
E
1
F
N
K
0
Output
Pr iceLevel
1
Y
*
Y

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Labour market equilibrium is shown in the upper panel of the 
diagram. Initially labour demand and supply are shown by L
D
and 
L
S
curve, the equilibrium real wage is given as OW
0
with full 
employment as N
F
. The corresponding level of output is shown in 
the lower panel of the diagram as OY and the aggregate supply 
curve is given as YS. 
Assume that there is improvement in technology and 
increase in given stock of capital. This will lead to shift of L
D
curve 
to the right to L
D1
. This means that the existing real wage level of 
OW
0
, there is excess demand for lab
our given as ‗EK‘. This will 
raise the real wage up till new equilibrium is established at E
1 
with 
employment at N
F1
and wage rate at W
1
. 
The corresponding potential output is Y
1 
and aggregate 
supply curve is Y
1
S
1
. Thus a shift of the labour demand curve leads 
to a shift of Aggregate Supply curve. 
Similarly shift of labour supply curve to the right also will lead 
to a shift of aggregate supply curve. This curve can shift if there is 
an increase in willingness to work at same wage rate or increase in 
size of population so that more worker enter labour force. But in this 
case output will increase with reduced real wage.