Why must the concepts of supply and demand as they pertain t

Why must the concepts of supply and demand as they pertain to product markets be modified when applied to labor markets?

Solution

The labour market it must be so that the labour demand is a derived demand curve. The demand curve of labour depends on the demand for the products. As more labour is employed in response to a fall in its price, its marginal product falls and no further units will be added once its marginal revenue product falls to the new wage rate. Thus the labour demand curve is downward sloping. However the industry’s demand curve for labour is less elastic than the individual demand curve. As the industry expands output will fall (because the industry faces a downward sloping demand curve for the final product), causing the final increase in each firm’s output, and hence em­ployment of labour, to be less than would occur if the output price remained unchanged.