Question

The demand for labor is a "derived demand." What does that mean? Explain how this derived demand depends on the productivity of a worker and the value of the product produced by a worker. Use the terms "average productivity," "marginal productivity," and "the law of diminishing marginal productivity" in your explanation. Provide examples that consider at least one of the following issues: (1) the impact of consumer demand on a product for the demand for labor that produces that product; (2) the impact of different kinds of labor skills on the demand for a particular level of labor skill; (3) on the impact of additional other resources (like capital or land) on the demand for labor that produces a product; and (4) the impact of technological innovation (including skill-oriented, knowledge -oriented, and device-oriented innovation)

Answer 1

Demand for factor resources like labor in particular is a derived demand

Derived demand means that consumers do not directly demand for these factor resources (labor), but do so indirectly by consuming goods and services which these laborers produce

Example:

1. The services of a farm worker are not demanded by households but households do want to consume the food products produced by the farm workers. Hence the demand for the services of a farm worker is a derived demand which is impacted by the consumer demand for the products that the farm workers help produce

2. Demand for automobiles creates a demand for automobile workers

Derived demand depends on the productivity of the laborer and the price of the product. This can be explained through the table below: Units of labour resource Total Product Average Productivity of labour Marginal Productivity of labour Product Price ($) Total Revenue ($) Marginal Revenue Product ($) 0 0 0 0 4 0 0 1 14 14 14 4 56 56 2 26 13 12 4 104 48 3 36 12 10 4 144 40 4 44 11 8 4 176 32 5 50 10 6 4 200 24 6 54 9 4 4 216 16 7 56 8 2 4 224 8

In the table it can be seen that as 1 additional unit of labor is employed, the total product increases, but the marginal productivity of labor, which is the additional units of output produced by employing 1 additional unit of labor, decreases.

This is due to the law of diminishing marginal productivity

According to The law of diminishing marginal productivity, as additional units of labor are employed, the effectiveness of each additional laborer starts decreasing after a certain point as the output keeps increasing. in the above table, we have assumed that the law of diminishing marginal productivity sets in from the 1st additional unit of labor that is added, for sake of simplicity

We can see from the table that with each new laborer that is added, the average productivity of labor decreases, and the marginal productivity of labor keeps decreasing to the point where if an additional unit of labor is added, marginal productivity will become zero

Hence, it can be said that derived demand for labor depends on the productivity of the laborer as marginal productivity can not be zero if profits need to be maximized

The product price is taken as $4 and is constant as we have assumed a competitive market where the firm is a price taker in the product market

The total revenue and marginal revenue product are calculated on basis of the product price. It can be seen that the marginal revenue keeps decreasing as an additional unit of labor is added. It keeps decreasing to a point where if an additional unit of labor is added, marginal revenue product will become zero, which means that the addition of an additional unit of labor will not bring about any increase in revenue, which is undesirable for a firm that is looking to maximize profits

Hence it can be said that the derived demand for labor depends on the price of the product along with the productivity of the laborer