Historical Example of Labor Supply and Demand

Historical Example of Labor Supply and Demand

Economists believed that a free market would self-correct and keep the economy in good standing. During the Great Depression the Laws of Supply and Demand didn’t support the theory. The labor was looked at as well as credit markets to explain the theory.

The Law of Supply stated that the higher the wage rate for labor, the more people are willing to work. The Law of Demand states that with higher wage rate then fewer employees will be hired. The economists believed that the market would reach equilibrium, but was unsuccessful. The wage rate would have had to decrease is to reach equilibrium. We have learned from the depression and that is why many employers are finding ways to make cuts in wages now instead of cutting jobs.

Economists believed that the credit market could self-correct using the Laws of Supply and Demand. The Law of Supply dictates that suppliers are willing to lend more at a higher interest rate. The Law of Demand dictates that people and businesses are willing to borrow more with a lower interest rate. During this time people were more interested in saving their money. The people were afraid of borrowing to much money which they may not be able to pay back.

Labor and credit markets crashed after the stock market crash in 1929. The economy did not have the time to get corrected. The economists were not correct in their theories. This was what led the country to fall into the Great Depression. We have to understand that the economist have learned from their mistakes and are trying to correct them in our economy today