Question

Why are the factors that shift the demand for a product different from the factors that shift the demand for labor? Why are the factors that shift the supply of a product different from those that shift the supply of labor?

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The goods and the labor markets are interconnected. The demand generated for labor is derived from the demand for the good which requires labor for production. A change in a single market trickles down to various other markets through the price change. Price conveys the information regarding the market conditions for the consumers and suppliers to make optimal decisions.

The demand for a product could reduce due to a fall in the price of its substitute. For example, the demand of ice cream could reduce due to a fall in the price of yogurts. This will result in movement of demand curve of ice creams to the left which will result in a lower price and a low incentive for suppliers to produce ice creams. Thus, the production of ice creams reduce resulting in a lower demand for labor. Here, the demand for the good reduced because of an exogenous factor, whereas the price of the good results in the lower demand for labor.

Similarly, an exogenous increase in demand for ice creams during summer season increases its price, incentivizing the suppliers to produce more and demand more labor. As a result, the wages go up, signaling the households to supply more labor. Here, the demand of product changes due to an exogenous factor, whereas the supply of labor responds to high wages.

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