Completed If product demand is high, a firm's demand for labour _______ (increases/decreases/remains unchanged). Because of...

Completed

If product demand is high, a firm's demand for labour _______ (increases/decreases/remains unchanged). Because of this we say labour demand is a ______ demand. How can we demonstrate this phenomenon on a graph of labour demand?

Solutions

Expert Solution

Increase, derived demand.

( When demand for a product increases, more labour will be needed to produce it. So demand for labour will increase.)

This can be explained with the help of a diagram.

Left panel shows the demand for a product and right panel shows the demand for labour. Initially the product market is in equlibrium determined by the intersection of demand for product DD and supply of product curve SS. P is the equlibrium price and Q is the equlibrium quantity. Labour market is also in equlibrium determined by the intersection of labour demand curve DLDL and labour supply curve SLSL. W is the wage set in the market. At W wage, QL Labourers are employed. Now demand for the product increases. So demand curve shifts to ridht from DD to D1 D1. Price of the product increases from P to P1. Quantity Increases from Q to Q1. In order to produce Q1 quantity more labour will be needed. So company's labour demand Increases. Labour demand curve shifts to right from DLDL to DL1DL1. New equlibrium in the labour market is determined by the intersection of new labour demand curve and initial labour supply curve. At the new equlibrium, QL1 workers will be employed at W1 wagerate.

Rahul Sunny answered 1 year ago

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