Correct Option
The correct option is 1, 2 and 3.
Explanation
The demand for labour is distinct from the demand for consumer goods. It is analyzed under the Marginal Productivity Theory of Distribution. In a competitive market, firms demand labour as a factor of production to generate output, and their hiring decisions are driven by the goal of profit maximization.
Statement-wise Analysis
- Statement 1 is Correct: The demand for labour is a derived demand. Unlike consumer goods, labour is not demanded for its own sake but for its contribution to the production of goods and services. For instance, an increase in the demand for automobiles leads to an increase in the demand for workers in the automobile industry.
- Statement 2 is Correct: A profit-maximising firm operates on the principle of marginal analysis. It will continue to employ additional units of labour as long as the additional revenue generated by the last unit (Value of Marginal Product of Labour) exceeds or equals the extra cost of hiring that unit (Wage Rate). Equilibrium is reached where Marginal Benefit = Marginal Cost.
- Statement 3 is Correct: The demand curve for labour is downward sloping primarily because the Law of Diminishing Marginal Product is assumed to hold. This law states that as more units of a variable factor (labour) are added to a fixed factor (capital/land), the additional output produced by each new unit of labour eventually declines. Consequently, firms will only hire more labour if the wage rate decreases to match the lower marginal productivity.
Key Takeaway
Key Takeaway: Labour demand is a derived demand dependent on the final product's market. Firms determine the optimal level of employment by equating the Value of Marginal Product of Labour (VMPL) with the wage rate, assuming diminishing marginal returns.