Extension and Contraction-Labour Demand and Supply

Extension and Contraction in Labour Demand

If the wage increases, the quantity demanded of labour decreases, as it becomes costlier to employ workers and firms always try to cut down on their cost of production and maximize profit, as they work on the concept of self-interest. This is called an “extension” in labour demand and causes an upward movement along the same demand curve. Similarly, a decrease in wages decreases firms cost of production and the quantity demanded of labour increases. This is known as “contraction” of labour demand. This causes a downward movement along the same demand curve. A labour demand curve is downward sloping. It is from the firms’ perspective.

The downward slope of labour demand graphs:

Wage and quantity demanded are inversely proportional. This means that if one quantity increases, the other decreases, and if one decreases, the other increases. The following labour demand graph illustrates the inverse relationship between wage rate and labour demand to better help understand the concept:

If you move from Point A to B, your wage decreases from 200 to 150 and your QD increases from 40 to 50. And if you move from Point B to A, your wage increases from 150 to 200 and quantity demanded decreases from 50 to 40.

Extension and Contraction in Labour Supply

If wages increases, the quantity supplied of labour increases, as workers get more in factor rewards and are paid more, which is always a motivating factor for them to supply their labour. This is known as an “extension” in supply and causes an upward movement along the supply curve. Similarly, a decrease in wages discourages workers from supplying their labour, as they receive less in factor rewards and are paid less and the quantity supplied of labour decreases. This is known as “contraction” of labour supply and causes a downward movement along the same supply curve. A labour supply curve is upward sloping. It is from the workers’ perspective.

The upward slope of labour supply graphs:

Wage and quantity supplied are directly proportional. This means that if one quantity increases, the other increases, and if one decreases, the other decreases. The following labour supply graph illustrates the direct relationship between wage rate and labour supply to better help understand the concept:

If you move from Point A to B, your wage decreases from 200 to 150 and your QS decreases from 50 to 40. And if you move from Point B to A, your wage increases from 150 to 200 and QS increase from 40 to 50.

It is important to note here that wage is an independent variable which influences quantity demanded and supplied making them the dependent variable, not the other way round. In graphs like these (of only labour demand or only labour supply) wage is the only factor influencing quantity demanded and supplied and we disregard other factors. Labour supply and labour demand graphs are made for a particular profession and we assume that those workers have the same skill level and experience.