• Statement 1: Businesses always want to sell their products at higher prices, this way they take in greater revenue.
• Statement 2: If wages go up on average then the workers, the people who earn the wages, will, as a group, earn a greater income.
Hear what and how the economist thinks:
This is an elasticity issue again. Each of these statements could be true, but then again, each of the statements could be false. Let’s consider statement 1 that businesses always want to sell their products at higher prices.
This is not always true. If it were true, then why wouldn’t businesses continue to raise their prices? Why would a computer company sell its computers at \($1,500\) instead of \($15,000?\) Why would a car company sell its cars for \($30,000\) instead of \($300,000?\) Businesses face downward-sloping demand curves and, as prices rise, quantity demanded falls. What matters to total revenue are the percentage of price rises as compared to the percentage of quantity demanded that falls. As we know, if price elasticity of demand is greater than 1, then a rise in price will result in lower total revenue, not higher total revenue.
Now, consider statement 2 that holds if wages rise, wage-earners (as a group) will earn greater incomes. Consider the following: Suppose that the equilibrium wage is \($20\) an hour, and that 100 people are working at this wage. Their weekly total income as a group (if each person works 40 hours a week) is \($80,000.\) Now suppose that, without any change in the supply of labor, the wage is raised to \($22\) an hour, which is \($2\) above the equilibrium wage. The demand curve for labor is downward-sloping, therefore, fewer people will be working at \($22\) an hour than at \($20\) an hour. Let’s say that the quantity demanded of labor falls to 80 people. What is the weekly income of the wage-earners? Eighty individuals, each earning \($22\) an hour over 40 hours a week, turns out to be \($70,400.\) In this case, the percentage rise in the wage was less than the percentage decline in the number of persons working, so that the total wage income fell. This is an elasticity concept—the elasticity of labor demand, which takes into account the percentage change in wages and the quantity demanded of labor.

Questions:
1. Price elasticity of demand involves two variables—price and quantity demanded. Specifically, price elasticity of demand deals with the percentage change in price relative to the percentage change in quantity demanded. With what two variables would elasticity of labor supply deal?
2. Suppose that the equilibrium wage rate in the unskilled labor market is \($7\) an hour, at which 10,000 persons are working (each for 40 hours a week). Now suppose that the government passes legislation mandating that the wage rate in the unskilled labor market cannot be less than \($10\) an hour. What will happen to the quantity demanded of labor? What will happen to the total income earned by the wage-earners in the unskilled labor market?