in automobile factories is derived from the demand for automobiles. When thedemand for the final product rises, the demand for labor increases. As the diagrambelow indicates, an increase in demand for labor is represented by a rightward shiftin the labor demand curve (since the quantity of labor demanded is greater at eachwage along the curve D').The effect of changes in the prices of other resources is not quite as straightforward.Consider, for example, the effect of an increase in the price of capital on the demandfor labor. The substitution effect resulting from a higher price of capital raises thedemand for labor. The scale effect, on the other hand, will lower the quantity of bothlabor and capital demanded. Thus, the effect of a higher price of capital on labordemand will depend on whether the substitution effect or the scale effect is larger inmagnitude.Another example might help to illustrate this point. Suppose that the wage rate risesfor adult workers in the fast-food industry. How will this affect the demand forteenage workers in this industry? On the one hand, each fast-food restaurant will tryto substitute teenagers for adults in each location. Since adults and teenagers arenot perfect substitutes, firms will still need some adult workers. This results in higherproduction costs and a higher equilibrium price of output. As the price of fast-foodproducts rises, firms cannot sell as much and will be forced to shut down somelocations and layoff workers (including both teenagers and adults). This scale effectresults in a reduction in the demand for teenage workers. When the price of adultworkers rises, the demand for teenager workers will rise if the substitution effect islarger than the scale effect; the demand for teenage workers will fall if the scaleeffect is larger than the substitution effect.To be sure that you understand this concept, think about the effect on the demandfor adult workers if a lower minimum wage was introduced for teenage workers.
Market, industry, and firm demand for labor
When discussing labor demand, it's important to distinguish whether we are talkingabout labor demand at the level of a market, an industry, or a firm. To understandthese distinctions, it is important to understand the following definitions: An industryconsists of all of the firms that produce a given type of output. An industry's demandfor labor consists of the total demand for a particular type of worker in a givenindustry. For example, we could investigate the demand for carpenters in theconstruction industry, or the demand for carpenters in the education industry (notethat carpenters are hired in many industries). The market for a given category of labor consists of all of the firms that might hire a given type of labor, regardless of the industry in which the firm operates. Thus, the market for carpenters includes thedemand for carpenters in all industries. An industry's labor demand curve isdetermined by adding together the labor demand curves for all of the firms in theindustry (this involves a horizontal summation of all of the individual firms' labordemand curves). The market demand for labor is determined by adding together allof the industry demand for labor curves.
Long-run vs. short-run labor demand
As you may recall from prior economics classes, economists define the short run asthe period of time in which capital is fixed. In the long run, all inputs, includingcapital, may be changed. The main difference between the short-run and long-run