In short run, how would the labor demand change? 1. price of a substitute(capital) for labor...

In short run, how would the labor demand change?

1. price of a substitute(capital) for labor increased

2. decrease in demand for final goods

Expert Solution

1. Price of a substitute (capital) for labor increased: The more the substitutability of other inputs for labor such as capital, Ceteris paribus, the higher will be the elasticity of demand for labor. Thus when the firms can easily substitute capital for labor, the higher the substitution will be for a given rise in the rate of wages, and therefore the higher will be a decline in the quantity of labor demanded.

2. Decrease in demand for final goods: A short-run shift in aggregate demand have its impact on the equilibrium output and price level. The labor demand by firm would be until the marginal revenue product of labor is equal to rate of wages. A decrease in demand for a final good decreases its price and reduces the demand for the factors used in producing it such as labor. Thus as there is a decline in demand for final goods thus it will reduce the production and less labour will be demanded

Rahul Sunny answered 8 months ago

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