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The concept of derived demand shows that as the demand for a product goes up,

(A) the price of the product goes up.

(B) the government’s tax revenue goes up.

(C) the quantity of the product sold goes down.

(D) the demand for public goods goes up.

(E) the demand for labor to make the product goes up.

Which of the following is an example of derived demand?

(A) When the price of strawberries falls, the quantity demanded rises.

(B) When the demand for cars increases, the demand for car workers increases.

(C) When the price of donuts falls, the demand for muffins decreases.

(D) When the demand for cookies increases, the demand for milk increases.

(E) When the supply of gold increases, the demand for gold rings increases.

Key Concepts

Application of Unit

Relation to Wage Rates

Wage rate is the price paid per unit of labor services, can be hours of work

The wage rate of a product can affect the supply of labor. When demand of labor increases it is likely that the supply will also increase. The wage rate of workers must decrease in order to increase the supply

AP Questions

Demand vs. Price

The

demand for product increases as prices decrease

The Movie, The Social Network, follows the start up of Facebook. The Founder of the website realized that they had more and more schools want to be part of their social network. The site was becoming more popular and it was time for them to expand to more colleges, and it was time to get more investors. The creator of the site along with his roommates could not expand by themselves so they must hire more interns.

1:18-1:34

Eventually the team moved out to california and the founder, Mark Zuckerberg, started a large company for Facebook

Wage Rate vs. Quantity of Labor

AP Free Response Answer

The quantity demanded for labor will be affected by the demand for the product

A higher demand for a product will allow firms to hire more units of labor

3.

(a).i.The demand for labor decreases and the equilibrium wage rate falls

ii.The quantity of labor demanded equals the quantity of labor supplied and the number of workers looking for a job unemployed would be zero

(b).i.a minimum wage that is effective will increase the wage rate and decrease the quantity of workers employed

ii.The number of workers looking for jobs increases

(c).The derived demand of labor comes from the demand for the product. The increase in demand for goods will result in an increase in demand for labor in Bazra. The quantity of workers employed will increase.

AP Free Response Question

Relation to Supply & Demand

Key Concepts

Supply:a schedule showing the amounts of a good or service that sellers will offer at various prices during some period

Demand:a schedule showing the amounts of a good or service that buyers wish to purchase at various prices during some time period

With an increased derived demand for Labor the supply would go up if production increases. The demand of labor is being determined by the demand of the product in the concept of derived demand.

Derived demand: the demand for a resource is derived from the demand for the products that the resource helps to produce

  • when demand of a product increases, the demand of workers used when producing the product increases.
  • Derived demand is typically used when determining the demand for labor, however, it the demand of a product can also determine the derived demand for other sources of input

Derived demand is not the Law of Demand

Law of Demand: as price of product increases, the quantity demanded falls

Real World Examples

  • Apple inc. releases a new product, the apple watch, and many consumers go to the store to buy the product. The demand for the product increased. More retail salesmen are needed to help every consumer. The demand of labor for the product has increased.

  • If a celebrity decides to endorse a product the demand will increase. The derived demand for labor of the product will also increase.

  • Birkenstock sandals become the desired shoes for spring of 2015, Due to the fact that the demand for Birkenstocks has increased, the derived demand for the labor of this product will also increase.

Multiple Choice Questions Cont.

If the marginal revenue product for hiring the next worker is higher than the wage of that worker, in order to maximize its profit, the firm should

(A) hire the worker.

(B) not hire the worker.

(C) hire the worker only if it reduces the cost of capital.

(D) lay off one worker.

(E) reduce its product price.

A; The firm will increase their profit by hiring another unit of labor if they bring in a hire MRP than the wage rate

This question relates to derived demand because the MRP is equal to the demand in the resource demand curve. Labor is a resource for the Product

Multiple Choice Questions

E; The demand of the product is used to find the derived demand of Labor.

Wrong Answers:

A;refers to the shift in product demand

B;Tax revenue changes do correlate with product price, however, this is not part of derived demand concept

C;This is the answer for Law of Demand rather than the derived demand

D;demand for public goods and demand for products do not correlate

B; More workers are required in order to produce more cars

Wrong Answers:

A;price does not change the derived demand

C;Price does not affect the derived demand

D;cookies and milk are complimentary goods, and neither is a source of labor

E;supply does not change the derived demand for labor

Derived Demand

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