Question

How does an increase in the demand for a product influence the demand for workers who produce that product? What is likely to happen to the equilibrium wage for these workers?

Answer 1

An increase in the demand for a product will lead to an increase in the price of the product as well. The price increase will provide an incentive to the the manufacturer or the seller to produce more. This will lead to an increase in the demand(called derived demand) for workers who produce that product by the seller.

Given the supply of the workers, an increase in the demand for workers will create excess demand for workers at the initial equilibrium wage. This will lead to an upward pressure on the Wage. Therefore, the equilibrium wage for these workers would increase. The labour market and this change is shown in the diagram below. The equilibrium wage has increased from W1 to W2 after the demand for workers Increased.