Labour markets differ somewhat from goods and services markets: goods and services are purchased and consumed directly by the buyers. In contrast, labour and capital are used as inputs in producing those goods and services. Prices in product markets reflect the value consumers place upon them and the supply conditions governing them. The wage is the price that equilibrates the supply and demand for a given type of labour; it reflects the value of the product that emerges from the use of capital and labour. The demand for labour (and capital) is thus a derived demand – the value of labour to the employer derives from the value of the end product in the marketplace for goods and services. It is not a final demand.
Demand for labour: a derived demand, reflecting
the demand for the output of final goods and services.
We must distinguish between the long run and the short run in our analysis of factor markets. On the supply side certain factors of production are fixed in the short run. For example, the supply of radiologists can be increased only over a period of years. While one hospital may be able to attract radiologists from another hospital to meet a shortage, this does not increase the supply in the economy as a whole.
On the demand side there is the conventional difference between the short and long run: in the short run some of a firm’s factors of production, such as capital, are fixed and therefore the demand for labour differs from when all factors are variable – the long run.
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