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Demand for Labor


Factors affecting demand for labor:

  • An increase (decrease) in the price of the firm’s output will increase (decrease) the demand for labor.
  • Price =>MR => MRP Labor => Demand for labor at each wage level .
  • Decrease in the price of computers => decreased demand for labor (e.g., customer service personnel).
  • Effect of technological improvements.
  • Change in demand depends on types of labor net increase in the demand for labor.
  • As evident by rising real wage rate (wage rate adjusted for inflation).

Which of the following factor is expected to increase demand elasticity of labor?

A.  Short time period
B.  High degree of substitution
C.  Less labor intensive production process


Labor will be  highly elastic if it can be substituted through automation.


Elasticity of demand for labor:

  • More elastic in the long run than in the short run.
  • Greater for firms with production processes that are more labor-intensive.
  • Degree to which labor & capital can be substituted.

Supply of Labor


  • Higher the wage rate, the more hours of leisure a worker will forego (substitution effect). This effect causes the labor supply curve to slope upward.
  • As a worker's income increases, his demand for leisure increases (income effect). This effect  makes the curve "bend backward" at some (maximum).
  • Size of the adult population, Capital accumulation.

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