Question

Predict how each of the following events will raise or lower the equilibrium wage and quantity of oil workers in Texas. In each case, sketch a demand and supply diagram to illustrate your answer. a. The price of coal rises. b. New oil-drilling equipment is invented that is cheap and requires few workers to run. c. Several major companies that do not mine coal open factories in Texas, offering many well-paid jobs outside the oil industry. d. Government imposes costly new regulations to make oil-drilling a safer job.

Short answer

a. The price of coal rises: Equilibrium wage and quantity of oil workers increase (Rightward shift in demand curve). b. New oil-drilling equipment: Equilibrium wage and quantity of oil workers decrease (Leftward shift in demand curve). c. Factories open in Texas, offering well-paid jobs outside the oil industry: Equilibrium wage increases, and quantity of oil workers decreases (Leftward shift in supply curve). d. Costly new regulations for oil-drilling: Equilibrium wage and quantity of oil workers decrease (Leftward shift in demand curve).

Step-by-step solution

a. The price of coal rises

When the price of coal rises, oil becomes a more attractive substitute for energy production. This will increase the demand for oil and consequently, the demand for oil workers will go up. With an upward shift in the demand curve, the equilibrium wage and quantity of oil workers will increase. To illustrate this with a demand and supply diagram, consider the following: 1. Draw the initial demand(D1) and supply(S1) curves. 2. Show the initial equilibrium wage (W1) and quantity (Q1) of oil workers. 3. Draw a new demand curve (D2) shifted to the right due to an increase in demand for oil workers (higher price of coal). 4. Identify the new equilibrium wage (W2) and quantity (Q2) of oil workers, both of which should be higher than the initial values.

b. New oil-drilling equipment is invented that is cheap and requires few workers to run

The introduction of new oil-drilling equipment that is cheap and requires fewer workers to run will increase the productivity of oil workers. This will lead to a decrease in the demand for oil workers as fewer workers will be needed to produce the same amount of oil. Less demand for oil workers means a downward shift in the demand curve, lowering both the equilibrium wage and quantity of oil workers. To illustrate this with a demand and supply diagram: 1. Draw the initial demand(D1) and supply(S1) curves. 2. Show the initial equilibrium wage (W1) and quantity (Q1) of oil workers. 3. Draw a new demand curve (D2) shifted to the left due to the decrease in demand for oil workers (new oil-drilling equipment). 4. Identify the new equilibrium wage (W2) and quantity (Q2) of oil workers, both of which should be lower than the initial values.

c. Several major companies that do not mine coal open factories in Texas, offering many well-paid jobs outside the oil industry

When several major companies open factories in Texas, offering well-paid jobs outside the oil industry, oil workers will have more job alternatives. This will lead to an increase in the supply of workers for these alternative jobs and a decrease in the supply of oil workers. With a leftward shift in the supply curve, the equilibrium wage for oil workers will rise, and the quantity of oil workers will go down. To illustrate this with a demand and supply diagram: 1. Draw the initial demand(D1) and supply(S1) curves. 2. Show the initial equilibrium wage (W1) and quantity (Q1) of oil workers. 3. Draw a new supply curve (S2) shifted to the left due to the decrease in supply of oil workers (more job alternatives). 4. Identify the new equilibrium wage (W2) and quantity (Q2) of oil workers, where W2 should be higher and Q2 lower than the initial values.

d. Government imposes costly new regulations to make oil-drilling a safer job

When the government imposes costly new regulations to make oil-drilling a safer job, operating costs for oil producers will go up. Consequently, businesses will try to cut production costs, which can lead to a decrease in demand for oil workers. Therefore, the demand curve for oil workers will shift to the left, lowering both the equilibrium wage and quantity of oil workers. To illustrate this with a demand and supply diagram: 1. Draw the initial demand(D1) and supply(S1) curves. 2. Show the initial equilibrium wage (W1) and quantity (Q1) of oil workers. 3. Draw a new demand curve (D2) shifted to the left due to a decrease in demand for oil workers (costly new regulations). 4. Identify the new equilibrium wage (W2) and quantity (Q2) of oil workers, both of which should be lower than the initial values.

Key concepts

Demand and Supply

The concepts of demand and supply are foundational in understanding how markets operate, including the market for labor, like oil workers in Texas. **Demand** refers to how much of a product or service is desired by buyers, while **supply** represents how much the market can offer. These forces interact to determine the equilibrium price and quantity in a market.
In the labor market for oil workers, demand is driven by companies looking to hire. This demand can increase if, for instance, oil becomes a more attractive energy source, as seen when the price of coal rises. In such cases, the demand curve shifts to the right, which is depicted graphically on a demand and supply diagram with a higher equilibrium wage and quantity of workers.
Conversely, if new technology reduces the need for workers, the demand for labor shifts to the left, leading to a lower equilibrium wage and quantity. This dynamic interaction highlights the sensitivity of the labor market to external factors affecting demand and supply.

Labor Market

The labor market is where workers and employers interact. It determines employment levels and wages based on the demand for and supply of labor. In our context, it specifically refers to oil workers in Texas. When major companies open new factories in Texas offering high-paying jobs, the dynamics of this market change.
When there are better job opportunities elsewhere, workers might leave the oil industry, leading to a reduced supply of oil workers. This shift is shown on a supply curve diagram, where the supply curve moves to the left, typically resulting in a higher equilibrium wage since employers need to raise wages to attract workers.
Thus, the labor market is highly influenced by alternative job opportunities and conditions affecting the supply and demand of available workers.

Production Costs

Production costs can significantly influence a business's labor needs. These costs include expenses for raw materials, technologies, and compliance with regulations. In our scenario where the government imposes costly regulations for safety in oil-drilling, production costs increase.
Higher production costs may lead businesses to look for ways to cut costs, often by reducing the workforce or slowing hiring. This can shift the demand curve for labor to the left, lowering the equilibrium wage and quantity of workers employed.
Companies constantly seek to balance production costs with labor needs to maintain profitability, affecting both wages and employment levels in their respective labor markets.

Substitutes in Production

Substitutes in production play an essential role in determining the demands on labor. A substitute in production is another good that can be produced using similar resources. In the energy industry, oil and coal are substitutes.
If the price of coal rises, businesses may turn to oil as a substitute, raising the demand for oil workers. This increased demand results in a rightward shift in the demand curve, raising wages and employment in the oil sector. This dynamic showcases how interconnected markets for substitutes can directly influence labor markets.
Understanding this relationship helps in predicting changes in the labor market, helping stakeholders to strategize accordingly.