The demand for labour is seen as a derived demand – it is only demanded by firms because it produces something that is in demand. The greater the demand for a product, the greater will be the demand for the labour which produces it. The elasticity of the demand for a particular type of labour will depend upon the elasticity of demand for the product and its relative importance in the production process. The easier it is to substitute capital for labour in the production process, the more elastic will be the demand for that type of labour. The demand that firms have for labour will depend upon its productivity – more particularly, the marginal product of labour.This has been fully
discussed in Chapter 5, but will be further developed here.