Furthermore, the production function can actually shift downward, i.e. productivity declines. This can occur because of social unrest and aging of the population with experienced workers being displaced by younger inexperienced workers. The quantity of labour demand varies according to the real wage rate expressed in constant dollars. The money wage is expressed in current or nominal dollars . As we have seen the SRAS curve assumes that current or nominal prices are constant.
Firms try to maximize profits.
As DMPL takes hold, eventually the cost of an additional worker exceeds the increase in revenue generated from additional sales. The firm will hire until revenue earned from the last unit of output per hour equals the real wage rate, i.e. real wage or relative wage rate is determining factor, not money wage . The supply curve of labour reflects the shows classic law of supply , that is the higher the price, the higher the supply and is upward sloping to the right. The supply of labour depends on the choice between work and non-work activities which is summed up in opportunity cost of goods and service that can be purchased with an additional hours work . The first is the substitution effect , that is, if real wage goes up cost of non-work time increases.