11owolea
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In Keynesian economics, as the output of the economy increases, and unemployment decreases, at first there is no increase in price (i.e. the AS curve is horizontal) as resources can be obtained without paying higher prices. However, as resources become more scarce, in order to increase output firms must pay more for their factors of production and thus costs and consequently prices begin to increase. This is shown by an upward sloping section on the AS curve. I am not sure how to show this reduction in unemployment on a labour supply and demand diagram. If there is unemployment, supply is greater than demand at the current wage rate. Output increasing which means that the demand for labour increases. Outward shifts in the demand curve cause the price to near the price at which there is no unemployment (at which demand and supply are equal). However, if as output increases, the price also increases, surely this will counteract the effect of increased demand and will mean that the labour market will not move towards reduced unemployment.
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KevinLonge
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(Original post by 11owolea)
In Keynesian economics, as the output of the economy increases, and unemployment decreases, at first there is no increase in price (i.e. the AS curve is horizontal) as resources can be obtained without paying higher prices. However, as resources become more scarce, in order to increase output firms must pay more for their factors of production and thus costs and consequently prices begin to increase. This is shown by an upward sloping section on the AS curve. I am not sure how to show this reduction in unemployment on a labour supply and demand diagram. If there is unemployment, supply is greater than demand at the current wage rate. Output increasing which means that the demand for labour increases. Outward shifts in the demand curve cause the price to near the price at which there is no unemployment (at which demand and supply are equal). However, if as output increases, the price also increases, surely this will counteract the effect of increased demand and will mean that the labour market will not move towards reduced unemployment.
You wouldn't really try to show unemployment decreasing on a labour market diagram, rather you would just show that employment increased, using the diagram below:
http://www.economicsonline.co.uk/How...ase-demand.png

Technically speaking, you can't always show that an increase in employment on a labour market diagram means a decrease in unemployment, because typically labour market diagrams are just showing a particular industry, and so you can't prove that employment didn't decrease in another industry (unless you say ceteris paribus or something). Typically, however, they won't expect any more out of you. In fact, you can usually get away without drawing any graphs, but instead just saying something like 'Employment, on the whole, will also increase (and so unemployment will decrease) as labour is a derived demand, wanted not for its own sake, but for the level of output it can produce and the value at which that output can be sold for (therefore an increase in AD and thus real output will lead to a rise in employment). If you are confused about anything I said, feel free to ask
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