P1

Q1

P Q
Graphical Illustration
Market this will definitely will define and tell the fair price of every price of the
labor. It means that market is the most reasonable determination of labor price in the basis of
the demand and supplyS1
labor in subsistence theory. Moreover, the laissez-faire doctrine states
that:
The market will determine the equilibrium price of labor.

P
S
1
P
1
Q
1

If there is increase in supply of labor, the supply curve will move.

The downward trend of the price of labor will only stop at the level of subsistence.
The level is the basis that would tell that individual wages of every laborers will keep their
earnings will be just and enough for their day-to-day expenses. Meaning, they can survive.
When the price is lower than the subsistence level of price, this is illogical. The
workers will be willing just to accept their income from their jobs in subsistence level. If the
price is below on what they need, they will tend not to accept that because if they do, they
will starve because the money that they will receive regularly will not sufficient to buy the
foods and other necessities they need in order to survive. This means that if you starve, you
will die. We can say that every decision of employees will define the survival of every
individual who are in the 2nd to 3rd level of business institutions. Therefore, the price will go
back to subsistence level.
In Classical Theory, this illustrate that the employers will just hire the right number of
employees where their total wages (which is treated as expense in the point of view of
capitalists) is equal to the cost factor.
The profit maximization for the economy as a whole may be written: w = pMn.
Where w means: money wage rate; p is level of prices and Mn is equal to the marginal
physical product of labor

The demand will be expressed as:

Ld=D

( wp )

Where Ld= demand for labor; and

( Wp )

= real wage rate.

Here, we can say that marginal product of labor when more workers are hired. We
should understand that when real wage rates are high, employers can only hire a limited
amount of labor. Then, if real wages rates are low, employers can hire more workers. We have
to remember that wages are costs to employers.
If level of employment increased, the wages will go down.
If wages rate increased, the demand for labor will go down. This is because the cost of
hiring is expensive. When the workers are low, the output is also low. So if the wages will go
dow, the employers tend to hire higher. If there are more employees, the output will also
increase.