If a decline in the price of capital occurs, then the demand for labor will increase solely because of the output effect.
In the labor markets, the law of demand is applied. The higher salary or wage in the labor market leads to a decrease in the quantity of labor demanded, while a lower salary or wage leads to an increase in the quantity of labor demanded.
The output effect is the situation in which an increase in the price of one input will increase a firms production costs and reduce its level of output. Thus, this reduces the demand for other inputs.
Hence, a decrease in output price leads to the increase in the demand for labor.
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