Demand for labour — Edexcel A-Level Economics A
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Demand for labour explained
Derived demand means that the demand for labour depends on the demand for the goods and services that labour produces.
Read the full explanation
Firms do not hire workers for their own sake; they hire them because those workers help to produce output that consumers or other firms will buy. If demand for the final product falls, firms need fewer workers at any given wage, so the labour demand curve shifts left. If demand for the final product rises, the labour demand curve shifts right. The strength of this link depends on how labour-intensive production is and how easily output demand can be met from other inputs. For example, a fall in demand for new houses reduces the demand for bricklayers, plumbers and electricians. In an MCQ, look for the option that connects product market conditions to hiring decisions.
Your focus
- Define derived demand and explain its relevance to the labour market.
- Explain how a change in demand for a final product shifts the demand for labour curve.
- Apply the concept of derived demand to a real-world example.
Demand for labour exam tips
Marking Points
- Define derived demand as demand for a factor of production that arises from the demand for the final good or service it helps to produce.
- Explain that firms hire labour to produce output that they expect to sell, so product demand is the underlying driver of labour demand.
- Show that a fall in demand for the final product shifts the demand for labour curve to the left at every wage rate.
- Show that a rise in demand for the final product shifts the demand for labour curve to the right at every wage rate.
- Link the strength of derived demand to the labour intensity of production and the availability of substitute inputs.
- Apply the concept to a concrete example, such as construction workers and the demand for new housing.
Examiner Tips
- 💡Look for the option that explicitly links the product market to the labour market.
- 💡Reject options that describe the supply of labour or the wage rate as the cause of a shift in labour demand.
- 💡Use a quick example, such as housing and construction workers, to test whether an option fits the definition of derived demand.
Common Mistakes
- Treating labour demand as independent of product demand. Correction: labour demand is derived, so it changes when demand for the final product changes.
- Confusing derived demand with joint demand. Correction: derived demand links a factor input to the product it helps to make; joint demand links goods consumed together.
- Assuming that a rise in product demand always raises labour demand by the same proportion. Correction: the size of the shift depends on productivity, labour intensity and the substitutability of capital for labour.
- Thinking that derived demand applies only to physical goods. Correction: it also applies to services, such as the demand for teachers arising from demand for education.