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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.
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.
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.
Now consider what would happen if the wages for physicians and physician assistants were not allowed to freely fluctuate, so that after the change in hospital preferences away from physicians and toward physician assistants, wages could not move from their previous market-clearing levels, and so remained there. Would there result a shortage or a surplus in the 2 markets? You may illustrate this with your graphs. (Hint: If you call your original equilibrium wage W*, than at that same W*, after one of the curves shifts, then will quantity demanded equal quantity supplied or not?) Provide your answer in one very brief paragraph.
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