Question

1. What is Labor Demand

2. Distinguish between an Isoquant Curve and an Isocost Curve.

3.         Discuss the determinants of Price Elasticity of Demand.

4.         Discuss the Marshall’s Rules of Derived Demand.

Answer 1

1. Labor Demand: Demand for labor describes the amount of of demand for labor that an economy or firm is willing to employ at a given point in time. It is determined by the real wage. As real wage increases, then demand for labor decreases. And as real wage decreases,then demand for labor increases.

2. Difference between an isoquant curve and an isocost curve:

(a) An isoquant shows the equal level of production that can be done with given level of inputs while an indifference curve shows the level of satisfaction that a consumer get from two goods.

(b) An indifference curve represents satisfaction which cannot be measured in physical units while an isoquant reresents production which can be measured in physical units.

(c) A higher indifference curve gives more satisfaction than a lower one but doesn't tell how much satisfaction is derived. While a higher isoquant gives more output and tells how much output can be produced with a higher isoquant compared with a lower one.

3. Determinants of price elasticity of demand

Price elasticity of demand is a measure of how much the quantity demanded changes with a change in price.The price elasticity of demand for a given good is determined by following factors:

(a) Availability of substitute goods: The more people substitutes there are for a given good,the greater the elasticity for a good. When there are no substitutes available, demand for a good is more inelastic.

(b) Necessity: Greater the necessity for a good, lower the elasticity . Consumers will buy the necessary products regardless of the price.

(c) Time duration : For non-durable goods, elasticity tends to be greater over the long-run than the short run.In the short-run it may be difficult for consumers to find substitutes in response to price change but in the long run consumers can adjust their behaviour.

(d) Proportion of the consumer's income: Products that consume a large portion of the consumer's income tend to have greater elasticity.

(e) Brand : An attachment to a certain brand can override senstivity to price changes, resulting in more inealstic demand.

4. Marshall's rules of derived demand:

Marshall-Hick's analysis states that in a two-factor model the elasticity of derived demand for either factor is higher when:

(a) the higher is the elasticity of substitution between the two factors,

(b) The higher is the share of the factor in the cost of production, provided that the elasticity of demand is higher than the elasticity of substitution,

(c) the higher is the elasticity of supply of the other factor,

(d) the higher is the elasticity of demand for the output produced by the two factors.