Question

1. In May, it was thought that there was a new drug for the treatment of...

1. In May, it was thought that there was a new drug for the treatment of new flu. Assuming that wage, w is unchanged, then draw a graph and analyze the impact of changes in drug demand on short-run labor demand.
2. In August, people found that the drug was ineffective, so the demand for the drug declined, draw a graph and analyze the impact of the reduction in demand on short-run labor demand.

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Answer #1

1. As the demand for drug increases, the firms producing the drug would increase their production for which they will employ more workers i.e., demand for labour will increase while supply remains constant in the short run. This will result in an increase in number of workers as well as an increase in the equilibrium wage rate. Short run labour demand curve moves to the right.

2. As the demand for the drug falls due to it being ineffective, firms will reduce its production or shut it down alltogether leading to retrenchment of employees due to which demand for labour will fall and the result of which equilibrium wage rate also falls down. Short run labour demand curve moves to the left.

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