Answer to Question #134246 in Economics of Enterprise for Jubu

Question

Suppose a new technology is coming to Bangladesh in near future that is going to require a lot of Civil Engineers/ Civil graduates to work. At the same time the tuition fee of studying Civil engineering has increased a bit too than before. How do you think the simultaneous occurrence of these two events is going to affect the equilibrium salary and quantity of Civil graduates?
Analyze and explain the situation graphically.

Answer 1

The equilibrium salary on the labour market will increase whereas the quantity of civil graduates falls.

The future technological advancement will increase the demand for civil engineers on the labour market. On the other hand, the resultant increase in the tuition fees towards civil engineering will reduce the number of students affording civil engineering course, leading to a fall in the supply of civil engineers on the labour market. Eventually, the increase in the demand for civil engineers and the corresponding decrease in the supply of civil engineers on the labour market will result in an upward thrust on equilibrium wage rate. The graph below illustrates the situation.

As shown on the graph, e1 is the initial equilibrium point on the labour market where the demand for civil engineers D1 interacts with the supply curve of civil engineers S1. L1 is the initial quantity of civil engineers on the labour market whereas w1 is the initial equilibrium wage rate.

The increase in demand for civil engineers due to new technology has seen the demand for civil engineers shifting outwards from D1 to D2: an increase. On the same note, the increase in tuition fees results in an upward shift of the supply curve from S1 to S2: a fall in supply. Eventually, the new equilibrium is established at point e2, where the new demand curve D2 interacts with the new supply curve S2. Resultantly, the equilibrium quantity of civil engineers in the market falls from L1 to L2 due to a decline in the number of civil engineering graduates, and the equilibrium wage rate increases from w1 to w2.