Demand and Supply

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In this assignment, we are considering a labor market, where "labor” is the commodity being exchanged, at a price called "wage.”  Quantity here is simply quantity of labor.  In this case, households are doing the "supplying,” as they supply labor.  Firms are doing the "demanding,” as they want to hire labor as an input to production.  So please don't get confused: the supply curve represents how much labor households will supply at different wages, and the demand curve represent how much labor firms will demand at different wages.  In this assignment,  hospitals are the firms, and two types of labor are being supplied: physicians (PHs) and physician assistants (PAs).  Let W=Wage and L=Labor.

  1. Draw market demand and supply curves for physicians and physician assistants indicating a market clearing price (wage) for each.  Label each graph.  Consider the effect on each labor market when the following happens: hospitals decide to substitute physician assistants for physicians, ceteris paribus.  Show this change on your graphs.
  2. What happens to the market wage for each type of labor as a result of the substitution?  What happens to the market-clearing quantity of each type of labor?  Provide your answer in one very brief paragraph, and illustrate with graphs.
  3. Now consider what would happen under the following scenario: The hospitals are contractually obligated to increase the wage of one group if the wage of the other group increases.  That is, if the wages of physicians are increased, then the wages of physician assistants must also be increased, and vice versa.  Would there result a shortage or a surplus in one or both of the two markets (that is, market for PHs and market for PAs)?   (Hint: If you call your new equilibrium wage is W*, then if the hospital is forced to pay a higher wage than W*, how will that impact quantity demanded compared with quantity supplied?  Provide your answer in one very brief paragraph, and illustrate with graphs.

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Explanation & Answer

Attached.

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Course
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Instructor
Date

Demand and supply
1. Demand curve for assistant physicians and assistant physicians
It shows the wages which will be charged on services offered by physicians and their assistants
at a particular period of time which is the quantity demanded. The curve slopes downwards from
left to right.

Wages

W

Demand Curve

Q
Quantity

When the demand for the services of physicians and their assistants is Q, the price charged will
be W. when the price is low; the demand for the services of physicians and the assistants is high
since hospitals find it cheaper to hire them.

Supply curve
It shows the services that the households will be willing to supply at a given price. The curve
slopes upwards from left to the right because when prices increase, the physicians will be willing
to offer more services so as to earn more profit hence the subsequent increase in supply.
Supply Curve of Physicians and their Assistants

W
Wages

Q
Quantity

When hospitals decide that physician assistant are to be substituted for by physicians, an increase
in demand of assistant physicians will be experienced while at the same time experiencing a
decrease in the demand for physicians. Therefore, quantity and wages of the assistants increase
hence the demand curve shift to the right. The quantity and wages of the physicians will on the
other hand decrees hence shifting to the left. Quantity demanded increase from Q1 to Q2.

Increase in Demand for Assistants

S

Wages

Shift of the demand curve

D2
D1

Q1

Q2
Quantity

The decrease in demand for the services of physicians...


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