Elasticity of labour Demand 
Elasticity of Labour Demand
A firm always incurs a change in labour or capital. It is important for a firm to know the effects on the wage or capital increase since it would help the firm make accurate decisions. A change in wage would make an impact on the firms employment. When there is a wage cut, it reduces the price of labour relative to that of capital, and now labour is cheaper. However, when the wage increase the price of labour increases and the firm would substitute away from labour toward capital. When the wage is either increasing or decreasing, there are two effects that we have to take into consideration: the scale effect and the substitution effect.
In figure 1, we can see the two effects. The scale effect is when there is above from point P to Q. This process indicates what happens to the inputs as the firm expands production in the case where wages are being cut. In the scale effect, we are only looking at the changes of both capital and labour. However, the substitution effect is the move from point Q to point R; where the firm takes advantage of the labour being cheaper. Since in this case the wage is cheaper, then the firm adopts a more labour-intensive input mix. Substituting away from capital and toward labour. It is important to notice that firm would use less amount of capital or more depending on what effect dominates. If substitution effect dominated the scale effect the firm would use less capital. If on the other hand the scale effect dominated the substitution effect the firm would use more capital.
The elasticity of demand tells us what is the percentage change in the quantity demanded of either capital or labour with respect of a change in the wage or in the cost per unit of capital. The elasticity of labour demand could tell us what might happen to the workers if the minimum wage, for example, were to be raised; and how this would affect the labour market. In November 4, 2014 the Venezuelan president Nicolas Maduro says he was
A firm always incurs a change in labour or capital. It is important for a firm to know the effects on the wage or capital increase since it would help the firm make accurate decisions. A change in wage would make an impact on the firms employment. When there is a wage cut, it reduces the price of labour relative to that of capital, and now labour is cheaper. However, when the wage increase the price of labour increases and the firm would substitute away from labour toward capital. When the wage is either increasing or decreasing, there are two effects that we have to take into consideration: the scale effect and the substitution effect.
In figure 1, we can see the two effects. The scale effect is when there is above from point P to Q. This process indicates what happens to the inputs as the firm expands production in the case where wages are being cut. In the scale effect, we are only looking at the changes of both capital and labour. However, the substitution effect is the move from point Q to point R; where the firm takes advantage of the labour being cheaper. Since in this case the wage is cheaper, then the firm adopts a more labour-intensive input mix. Substituting away from capital and toward labour. It is important to notice that firm would use less amount of capital or more depending on what effect dominates. If substitution effect dominated the scale effect the firm would use less capital. If on the other hand the scale effect dominated the substitution effect the firm would use more capital.
The elasticity of demand tells us what is the percentage change in the quantity demanded of either capital or labour with respect of a change in the wage or in the cost per unit of capital. The elasticity of labour demand could tell us what might happen to the workers if the minimum wage, for example, were to be raised; and how this would affect the labour market. In November 4, 2014 the Venezuelan president Nicolas Maduro says he was
Bibliography: Hamermesh, D. Do labor costs affect companies’ demand for labor?. IZA World of Labor 2014: 3 doi: 10.15185/izawol.3 "Borjas Labor Economics studied : BUS 101 : Acadia : Class Note." Insert Name of Site in Italics. N.p., n.d. Web. 6 Nov. 2014 <http://www.coursehero.com/file/6921487/Borjas-Labor-Economics-studied/>.