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

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?

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Answer #1

Note that demand for labor is the product of price of the product and the marginal product of labor. If any of these two variables are increased, demand for labor increases. In the figure below, demand for labor is LD1 and is computed as P1 * MPL. Now in product market, the demand is increased to D2. This increases the price to P2. As a result, demand for labor becomes P2 * MPL. Since P2 > P1, we see that demand for labor also increases.

Thus, If product demand is high, a firm's demand for labour increases. Because of this we say labour demand is a derived demand.

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