Question

1. Consider the orange-growing industry, which hires workers on a common labor market and sells oranges on a common product market. Firms in the industry have nearly identical production functions and capital.   Suppose that a freeze affects the industry in the following way: some oranges on each tree are damaged and cannot be sold, but others are fine. As a result, each worker takes longer to harvest oranges from each tree. What is the effect on Labor Demand for workers in this industry? Think carefully about all the components of Labor Demand.

Answer 1

The labor demand curve is mainly affected by factors such as

· Change in demand of the quantity produced

· Any change in production process ( if it uses less or more labor)

· Any change in government policies

· Level of education and training of worker

· Price of the other input variables and number of firms

In the given scenario, as the freeze is affecting the industry. Due to which production process has changed as it requires more time for each worker. Hence, output of each worker would be decreased. Hence, a greater number of workers would be needed and therefore, Labour demand will increase.

Because of the freeze, the supply of oranges would be decreased causing a rise in demand of the oranges. Now, as the demand increases, the prices would rise and hence profits would rise which would then help in increasing labour demand.

As the freeze is adversely affecting the production of orange for the whole industry, an intervention of government is expected in order to uplift the industry. This might help in increasing the labor demand.

Assuming that other factors are not changed as much, hence, not affecting labour demand considerably. Therefore, an overall effect of increase in labour demand can be expected.