3.5.3

• wage rate - price of labour
• if wages are too high, labour supply will be high but labour demand will be low because firms don’t want to pay high wages to more workers - leads to unemployment
• in a competitive market, workers will have to accept lower wages or even go without a job, meanign that the wage rate will fall to the market clearing wage rate
• The market clearing wage rate is the wage level where the quantity of labor supplied by workers equals the quantity of labor demanded by employers
• if wages are too low labour demand will be high but supply will be low. leads to excess demand, so there will be a labour shortage because workers will not work if they are not paid enough to do so
• When there is a labour shortage, firms will have to pay workers more to convince them to work so the wage rate will rise towards the market clearing wage