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Having explored the demand side, we now turn to the supply side. As already mentioned, it is the households which determine how much labour to supply at a given wage rate. Their supply decision is essentially a choice between income and leisure. On the one hand, individuals enjoy leisure and find work irksome and on the other, they value income for which they must work. So there is a trade-off between enjoying leisure and spending more hours for work. To derive the labour supply curve for a single individual, let us assume at some wage rate w , th1 individual supplies l units1of labour. Now suppose the wage rises to w . T2is increase in wage rate will have two effects: First, due to the increase in wage rate, the opportunity cost of leisure increases which makes leisure costlier. Therefore, the individual will want to enjoy less leisure. As a result, they will work for longer hours. Second, because of the increase in wage rate to w , the 2 purchasing power of the individual increases. So, she would want to spend more on leisure activities. The final effect of the increase in wage rate will depend on which of the two effects predominates. At low wage rates, the first effect dominates the second and so the individual will be willing to supply more labour with an increase in wage rate. But at high wage rates, the second effect dominates the first and the individual will be willing to supply less labour for every increase in wage rate. Thus, we get a backward bending individual labour supply curve which shows that up to a certain wage rate for every increase in wage rate, there is an increased supply of labour. Beyond this wage rate for every increase in wage rate, labour supply will decrease. Nevertheless, the market supply curve of labour, which we obtain by aggregating individuals’ supply at different wages, will be upward sloping because though at higher wages some individuals may be willing to work less, many more individuals will be attracted to supply more labour. With an upward sloping supply curve and downward sloping demand curve, the equilibrium wage rate is determined at the point where these two 76 curves intersect; in other words, where the labour that the households wish i to supply is equal to the labour that the firms wish to hire. This is shown in o the diagram. c o i M o Shifts in Demand and Supply u In the above section, we studied market equilibrium under the assumption r that tastes and preferences of the consumers, prices of the related n I commodities, incomes of the consumers, technology, size of the market, prices of the inputs used in production, etc remain constant. However, with changes in one or more of these factors either the supply or the demand curve or both may shift, thereby affecting the equilibrium price and quantity. Here, we first develop the general theory which outlines the impact of these shifts on equilibrium and then discuss the impact of changes in some of the above mentioned factors on equilibrium. Demand Shift Consider Figure 5.2 in which we depict the impact of demand shift when the number of firms is fixed. Here, the initial equilibrium point is E where the market demand curve DD and the market supply curve SS intersect so that q and p 0 0 0 0 are the equilibrium quantity and price respectively. Reprint 2026-27