perhaps someone can offer up an example that will clear up this disconnect in my head. why is the demand for labor less elastic with production processes that are less labor intensive? it seems that if production process is not that dependent on labor then it willl be more expendible, more discretionary…thus more elastic? thanks, john
think of it as a renewable resource.
Im curious myself. The only reasoning i can conjure up is that less labor intensive means more technology/capital is being used to replace labor. Can anyone explain this thanks
I can try… if you have a production process that relies 100% on labour, you’re at the mercy of the unions the price of labour is effectively set, all you can do is adjust your process to amek the most efficient use of it at the price. if you only use a small amount of labour in your process, you couldn’t give a toss how much it cost you just take the little amount you need and don’t care how much it costs. does that help?
so is it correct to say that when a company’s demand for labor is greater it will be more elastic because they have to spend a greater amount of their resources on labor in oder to facilitate business? might be more intuitive to think about it from perspective of employer vs. employee/labor market? thanks corrupt
well theres no saying if thats the correct way to put it, but thats how i remember it and it works for me.
one other thinking process… Consider this hypothetical analogy: Your monthly budget(spending) has only two items… amount u spend on subway and amount u spend on movies. And assume that you have limited budget of $100 per month. you can deviate a bit from that $100 mark… but not much. Now, assume that your spending on subs is 95/100 ( 19 subs per month @ $5 per sub) … spending on movies 5/100 (one movie per month @ $5 per movie). Now, say that price of sub increases to $6 (20% change in price)… it’s gonna hurt your budget a lot. You try to seek all sorts of measures to minimize the consumption of subs. Either u shift to other food or u decrease the number of subs… what ever way u choose… you are gonna take out large no: of subs from ur monthly budget. A similar 20% increase movie tickets won’t be having much effect. You probably won’t even notice about that. bottom line is… higher the proportion a good occupies your budget, higher is it’s sensitivity for change in price i.e. higher the elasticity. Now, apply this analogy to ur company budget… replace subs with labor and movies with tech stuff. In labor intensive companies (where you spend a lot on labor) even a small increase in price would cause lots of layoffs and vice versa… just like u did with ur subs… I hope this helps. Good Luck.
ram mohan to the resuce again !!! makes sense buddy…
thanks ram, that’s pretty much how i figured it out as welll. easier to conceptualize if you think in terms of the employer and their budget in each situation.
Ill see if i can conjure up some old econ theory. think of a production function, Y=(K^.3,L^.7) and Y’=(K^.5,L^.5) the first derivative of Y with respect to L is = .7(K^.3/L^.3) , and Y’ with respect to L = .5(K^.5/L^.5) if inputs, K,L are the same , the elasticity is greater for the more labor intensive first equation Y.
good examples. thanks!
ram mohan Thank you for making sense out of this for me, Economics is like a foreign language for me.