Labor is a resource that is necessary to produce many goods. "If the price of labor falls," says the economist, "the prices of goods will soon follow." How does this work?

the correct answer is: If the price of labor falls, the supply of goods rises, and the prices of those goods fall.

I cant't seem to make sense of this.

Question

Labor is a resource that is necessary to produce many goods. "If the price of labor falls," says the economist, "the prices of goods will soon follow." How does this work?

the correct answer is:  If the price of labor falls, the supply of goods rises, and the prices of those goods fall.


I cant't seem to make sense of this.

dmndlife24 · Answer

Decreasing price of labor = increase of supply = decreasing price of goods

This also results in a decrease of demand for the product since the decrease in the price of product lowers the value of the marginal product of labor.