Question

1. Explain why the labor demand curve for an individual firm is downward sloping. Compare the demand elasticity in the short run and long run, which one is more elastic and why?

Answer 1

• The labour demand curve for an individual firm is downward sloping because of the law of diminishing returns.
• The law of diminishing returns of labour states that as more worker's are hired, the marginal product of labour will start to decline. This will cause the marginal product of labour to fall as well.
• The demand elasticity of labour in short run measures how the demand changes as wages Change when the capital is held constant.
• As marginal product declines, the short run demand curve decreases and is downward sloping.
• The demand elasticity of labour in long run gives the firms employment response at a given wage and it is also downward sloping.
• The demand elasticity of labour is more elastic in long run than in short run.
• This is because in long run, the consumers get more time to adjust to the price changes than in short run.
• The greater the time they get to adjust themselves, greater will be the elasticity of demand for workers who produce the product.
• The firms will also enjoy greater economic opportunities they gain by the changes in wages.
• As a result, the demand curve is highly elastic in long run than in short run.