Question

Suppose a firm’s production function is given by Q=F(K,L) . Describe the differences between the firm’s demand for labour in the short-run and long-run.

Answer 1

The demand for labor is a derived demand.In other words, it depends on the demand for output or the product produced using this labor. For eg; the demand for a tailor depends on the quantity in demand for his stitched clothes.Thus in both short run and long run , the demand for an input depends on and is derived from the demand for both the firm's level of output and cost of inputs.In the short run,only one factor is variable where capital is fixed and labor is variable whereas in the long run both labor and capital are variable.Long run demand for labor is more elastic than short run demand.The elasticity of product demand icreases with time.

The long run employment response that results from a fall in the wage rate will be greater than the short run response.This is because , generally a change in one input causes the marginal product of the other input to cahnge in the same direction.When the wage rate falls in the short run, the quantity of labor demanded increases.Given the pricel(K), we would expect an increase in labor employment along with a rise in capital employment.Thus a rise in K leads to tge ris ein the marginal product of labor.Also when the price of labor falls relative to the price of K, the enterprenuer puts his efforts in implenting new technologies that would reduce the need for relatively higher priced inputs.