Question

If during the first year of the new administration, Consumer demand for clothing increases and prices for capital used in producing output in the clothing market falls. Explain the long-term effects each will have on both wages and employment levels in the domestic clothing labor market?

Answer 1

to understand this question lets assume that their are two factors of production labour and capital

With the increase in demand ,prices of a good will rise in short run because supply in shortrun is constant and since the price of capital used in producing output has fallen (that means it would be cheaper to borrow capital which means loan can be taken at lower interest rate) so extra revenue generated will increase the wage rate . in long run high wages will attract more labour in the cloth manufacturing industry and more labour willing to work will bring down wage rate which has risen in short run due to increase in demand but due to increase in demand the employment level will increase .