Labour Markets and Wage Determination: Question 6

Worked solution

Step 1: Recall what “derived demand” means

A good or factor of production has a derived demand when it is not wanted for its own sake, but because of something else it helps to produce or provide. Labour is the classic example: firms do not employ workers because they enjoy having workers around, but because those workers produce output that can be sold for revenue. This is formalised through marginal revenue product ($MRP = MPP \times MR$), which links a worker’s value to the firm directly to the value of what that worker helps produce.

Step 2: Check option A

Option A states this exactly: labour is demanded because of the goods or services it produces, so the demand for labour derives from (comes from) the demand for those goods or services. In the bakery example, nobody wants “bakers” as an end in themselves. Bakers are hired only because customers demand bread. If demand for bread disappeared, the derived demand for bakers would disappear with it. This is the correct definition of derived demand.

Step 3: Rule out options B, C and D

• Option B describes how a firm’s profit (revenue minus costs) is calculated, which is unrelated to why labour is demanded in the first place.
• Option C describes a mechanical calculation (output divided by price), not the economic reason a firm wants workers. It does not explain why the demand for labour exists at all.
• Option D confuses derived demand with human capital or the determinants of an individual worker’s own productivity and wage, rather than explaining why demand for labour as a whole is derived from something else.

None of B, C or D captures the idea that the demand for labour comes from, is “derived from”, the demand for the output labour produces.

Final answer

Option A. The demand for labour is a derived demand because workers are hired not for their own sake but because of the goods and services (here, bread) that consumers demand and that labour helps to produce.