Question

explain why The elasticity of demand for labor is higher the higher the elasticity of supply of the substitutable input.

Answer 1

Elasticity of demand of any good highly depends on substitutability of the good . Higher the elasticity of supply of the substitutable goods means supply of such goods is highly responsive to price changes . Let us assume substitutable input is capital . It means as rental rate rises by one unit or one dollar , supply of capital rises by more than one dollar . So producers find it easy to procure more and more capital by spending just a few dollars .

Thus producers try to use capital more as inputs if elasticity of supply rises further and thus less of labor , which can substituted by capital . So elasticity of demand for labor rises . For a slight rise in wage level , quantity demanded for labor falls much below because now producers can get capital easily .