Answer to Question #288280 in Macroeconomics for Hansi

Question #288280

The demand management policies would not be productive in generating employment in the long run.Do u agree ? Give a detailed explanation .

1
Expert's answer
2022-01-17T16:23:00-0500

In the long run, firms can change the technology and structure of production, so labor and capital are variable production factors. By changing the K/L ratio, the employer is guided by the ratio of the marginal productivity of these factors, comparing with the r/w ratio, so any changes in the prices of labor or capital, while maintaining their previous productivity, will necessarily lead to an increase or decrease in employment. An increase in the productivity of one of the factors will change the quantity demanded for labor if the prices of the factors remain unchanged. Thus, in the long run, there is a substitution effect, i.e. a more expensive resource is replaced by a cheaper one. With an increase in wages, it is profitable to replace labor with capital, the substitution effect operates in the same direction as the scale effect, i.e. reduces employment.


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