Answer to Question #170410 in Microeconomics for adarsh

Question

“Increase in the price of a commodity ‘X’ has no relationship with the

level of employment in perfectly competitive product and factor markets”.

Is this statement True or False? Justify and logically analyze your

argument. Draw graphs if necessary.

Answer 1

Solution:

The statement is not true. This is because the level of employment in perfectly competitive product and factor markets is related to the output demand and prices. The firm’s demand for labor is a derived demand. This means that, it is derived from the demand for the firm’s output. If the demand for the firm’s output or product increases, the firm will demand more labor and will hire more workers. Increase in products demand will push its prices up, including leading to an increased demand for factors of production. If the demand for the firm’s product or output falls, which will lead to a fall in prices, the firm will demand less labor and will reduce its workers, including demanding less factors of production.