Economics
Factor Demand and Factor Supply
Factor demand refers to the quantity of factors of production, such as labor and capital, that firms are willing to employ at various prices. Factor supply, on the other hand, represents the quantity of these factors that individuals are willing to offer at different prices. The interaction of factor demand and factor supply determines the equilibrium price and quantity of factors in the market.
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12 Key excerpts on "Factor Demand and Factor Supply"
eBook - PDF- Colin Harbury(Author)
- 2014(Publication Date)
- Pergamon(Publisher)
CHAPTER 4 Distribution: Factors of Production and their Prices The study of factors of production plays a double role in economics. It helps to answer two of the main questions referred to at the beginning of this book: (1) how production is best organized (because factor prices and productivities lie behind the cost curves of firms) and (2) for whom goods are produced (because the prices of factors of production lie behind the distribution of incomes). Market determination of the prices of factors of production, labour, capital and land, is analysed in a manner closely paralleling that used for the prices of goods and services — by studying the forces of supply and demand. DEMAND The demand for the services of a factor of production is the schedule of quantities which businesses want to buy at varying prices during a period of time. The demand is said to be DERIVED from the value of the goods which a factor produces. It is determined by a factor's productivity and the ease with which it may be substituted for other factors. The elasticity of demand for a factor depends on these influences, on the time allowed for a price change to take effect and on the relative importance of the factor in total costs. The technical efficiency, or productivity, with which factors of production can be combined to produce given outputs (the PRODUCTION FUNCTION) is a basic determinant of the costs of a firm. When the prices of the services of factors are known, a firm is able to select the least cost combination for each level of output. Productivity depends critically upon whether the short period or the long period is under consideration. The short period is defined as that during which at least one of the factors is fixed in supply. As units of a VARIABLE factor are used together with a fixed one, the MARGINAL PHYSICAL PRODUCT (M.P.P.) of the variable factor tends eventually to fall. This phenomenon is known as the LAW OF DIMINISHING RETURNS.
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
14 The Factor MarketThe Factor Market; Factor Demand under The Marginal Productivity Theory of Distribution ; Factor Supply under The Marginal Productivity Theory of Distribution ; Monopolistic and Monopsonistic Exploitation ; Labour Unions and Unemployment Product Exhaustion theorems .14.1 Introduction to Distribution Theory
The earlier chapters dealt with the theory of value or price theory as it pertains to the product market. The emphasis was on the analysis of consumer demand for a good or service and producer supply of goods and services. In essence, it was the study of the way in which equilibrium was achieved in the product market based on supply and demand analysis. This equilibrium gave the optimum price (or market value) of the product and the optimal quantities.The focus now moves from the product market to the factor market. These factor inputs into the production process are typically identified as labour, capital, land and entrepreneurship, among others. The interest centres on how the value of the product is distributed among the factor inputs that generate output in what is referred to as Distribution Theory. It is still, in a sense, a theory of value and price – the valuing and pricing of inputs into the production process.14.1.1 Derived demand
Factor market theory considers the demand for and supply of the factors of production and the way in which the value of output is created by and shared among these factor inputs. In this case, the major difference between the theory of value and the theory of distribution is that, whereas goods and services are considered to be desired for their intrinsic quality (utility), factor inputs are considered to be desired only for their contribution to output. Hence the demand for factors is seen as a derived demand .Studying the nature of the demand for and supply of factors of production is important at all levels of production and consumption from a small domestic protected market to the large global market. This is particularly so for the increasingly mobile factors in a globalized world, factors such as international capital and entrepreneurship. The study of the factor market provides an understanding of how the structure of the market affects the demand for factors and, particularly in the case of labour, how income and preferences for leisure/work affect factor supply.
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
C H A P T E R 15 The Demand for Factors of Production I n the preceding 14 chapters, we have studied markets for consumption goods. In this and the next two chapters, we will study markets for factors of production (also called inputs). Factors of production, such as labor and capital, are supplied by individual households and demanded by firms, which use them to produce output for consumption. In this chapter, we study the firm ’ s demand for inputs. Firms demand inputs only because they can be used to produce output. Therefore, the value of those inputs depends on conditions in the output market. For example, a farmer ’ s demand for fertilizer depends on the price at which he can sell his crops. The need to take account of conditions in the output market means that the derivation of the firm ’ s demand for factors will be more subtle than the derivation of the consumer ’ s demand for consumption goods. The firm ’ s income is paid out to the various factors of production. Workers receive wages, the owners of capital receive rental payments for the use of their facilities, and so forth. In the last section of this chapter, we use our understanding of the firm ’ s factor demand curves to see what determines how the firm ’ s income is distributed. 15.1 The Firm ’ s Demand for Factors in the Short Run In the short run, only one factor of production is variable, and we will assume that factor to be labor. Thus, we will study the demand for labor on the assumption that the firm uses some fixed quantity of capital. The Marginal Revenue Product of Labor Recall from Chapter 6 that the total and marginal product of labor curves are typically shaped like those in the first two panels of Exhibit 15.1. We will also be interested in the marginal revenue product of labor ( MRP L ) , defined as the additional revenue earned by the firm when one additional unit of labor is employed.
eBook - PDF- Martha L. Olney(Author)
- 2015(Publication Date)
- Wiley(Publisher)
Chapter 9 Factor Markets How many workers does a business hire? How much does an acre of land sell for? How many machines does a business purchase? These are questions about the markets for the factors of production: labor, land, and physical capital. The answers draw upon the supply and demand model, but with slight twists of language. And the roles have switched: Businesses are the buyers who demand factors of production; households are the sellers who supply factors of production. Let’s look at each of these three markets in turn: labor, land, and physical capital. KEY TERMS AND CONCEPTS • Labor supply • Labor–leisure tradeoff • Wage • Opportunity cost of leisure • Foregone wages • The substitution effect • The income effect • Backward-bending supply curve • Labor supply curve • Marginal revenue product of labor (MRP) • Marginal physical product of labor (MPP) • Derived demand • Marginal revenue product curve • Labor demand curve • Equilibrium or market wage • Equilibrium wage • Labor surplus • Labor shortage • Land supply curve • Marginal revenue product of the land • Physical capital • Buildings • Machinery • Equipment or producer durable goods 118 Labor Supply 119 • Marginal revenue product of capital • Price of capital • Expected rate of return • Interest rates • Investment decision rule • Investment spending • External finance • Internal finance • Investment demand curve • Investment spending • Optimism • Pessimism KEY EQUATIONS • Marginal revenue product • Investment decision rule KEY GRAPHS • Labor market equilibrium • Land market • Investment demand LABOR MARKETS Demand and supply was introduced in Chapter 3. What determines the price of spiral notebooks? Demand and supply. The demand for spiral notebooks captures the behavior of buyers of notebooks. At a higher price, there is a lower quantity demanded. The demand curve slopes down. The supply of spiral notebooks captures the behavior of sellers of notebooks.
- Berkeley Hill(Author)
- 2013(Publication Date)
- Pergamon(Publisher)
For example, if income tax is increased on unmarried men and decreased on married men, leaving in taste towards good Swing in taste away from the good 62 An Introduction to Economics for Students of Agriculture average spendable income unchanged, it could be expected that the demand for sports cars in the country as a whole would decline but the demand for family saloons would increase. SHIFTS ALONG THE DEMAND CURVE AND SHIFTS OF THE WHOLE DEMAND CURVE FOR A COMMODITY To conclude this section on demand, it is worth recapitulating on the ways the factors described above affect the demand curve. A demand curve shows the quantities of a commodity which consumers are willing and able to take from the market at a range of given prices of the com-modity. If the price of the commodity is altered, because a shift in the supply curve causes the demand curve and the supply curve to intersect at a different level, more (or less) will be bought; this involves a move-ment along the demand curve. However, the whole curve will be shifted to the left or right by a change in consumer income, a change in the prices of competitive or complementary goods, changes in taste, popula-tion changes or a change in the distribution of incomes between house-holds. Having considered the demand for commodities in detail, the same approach will now be adopted to the supply of goods and services. B. The Theory of Supply THE MEANING OF SUPPLY AND FACTORS WHICH DETERMINE IT The supply of a commodity can be defined as the quantity that pro-ducers are willing and able to offer for sale in a given time period. Like demand, supply is a flow of goods and services. The supply of any good depends on five factors: (a) the price of the good (PA) (b) the prices of other goods which firms could produce or do produce (PB, .... ΛΟ (c) the prices of factors of production i.e.
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
In the early stages of development, increases in real wages draw greater supplies of labour. When this process slows or reverses, this is taken as an indication of a country reaching a level of affluence that marks it as a developed society or one that may be described as an affluent society. S L L M L 416 FACTOR MARKET EQUILIBRIUM 14.6 This supply analysis is supposed to hold in theory whether the supply of labour is for a perfectly competitive or imperfectly competitive market. In reality, some countries may show a secular deterioration in real wages over time but it may be difficult to draw the reverse conclusion (i.e. that the country is becoming less affluent). There are multiple factors that could affect the trends in real wages. Teal (1995) found a substantial decline in real wages in Ghana over the previous twenty years and noted there was insufficient investment to raise labour demand faster than supply and there was a fall in productivity. Nevertheless, he found it possible that output was rising. 14.6 FACTOR MARKET EQUILIBRIUM UNDER THE MARGINAL PRODUCTIVITY THEORY C H A P T E R 14 Determination of price and employment of an input Regular supply and demand analysis is used in the market. Equilibrium is found the same way as in the product market by using demand and supply analysis. The equation of demand and supply determines the equilibrium price for the factor and the equilibrium quantity of the factor employed. This occurs at the intersection of the market demand and supply curves. This supply and demand analysis is similar to that of the product market with the exception that the demand for a factor is a derived demand . As shown before, this demand is derived from the marginal physical product of the factor input and the output price or marginal revenue depending on the market structure.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those six months, such as increases in supply and decreases in the demand for crude oil. This chapter introduces the economic model of demand and supply—one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities. 3.1 | Demand, Supply, and Equilibrium in Markets for Goods and Services By the end of this section, you will be able to: • Explain demand, quantity demanded, and the law of demand • Identify a demand curve and a supply curve • Explain supply, quantity supply, and the law of supply • Explain equilibrium, equilibrium price, and equilibrium quantity First let’s first focus on what economists mean by demand, what they mean by supply, and then how demand and supply interact in a market. 44 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col11626/1.10 Demand for Goods and Services Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants—a consumer may be able to differentiate between a need and a want, but from an economist’s perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand. What a buyer pays for a unit of the specific good or service is called price. The total number of units purchased at that price is called the quantity demanded. A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those six months, such as increases in supply and decreases in the demand for crude oil. This chapter introduces the economic model of demand and supply—one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities. 3.1 | Demand, Supply, and Equilibrium in Markets for Goods and Services By the end of this section, you will be able to: • Explain demand, quantity demanded, and the law of demand • Identify a demand curve and a supply curve • Explain supply, quantity supplied, and the law of supply • Explain equilibrium, equilibrium price, and equilibrium quantity First let’s first focus on what economists mean by demand, what they mean by supply, and then how demand and supply interact in a market. 46 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col23729/1.3 Demand for Goods and Services Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is fundamentally based on needs and wants—if you have no need or want for something, you won't buy it. While a consumer may be able to differentiate between a need and a want, but from an economist’s perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand. By this definition, a homeless person probably has no effective demand for shelter. What a buyer pays for a unit of the specific good or service is called price. The total number of units that consumers would purchase at that price is called the quantity demanded.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those six months, such as increases in supply and decreases in the demand for crude oil. This chapter introduces the economic model of demand and supply—one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities. 3.1 | Demand, Supply, and Equilibrium in Markets for Goods and Services By the end of this section, you will be able to: • Explain demand, quantity demanded, and the law of demand • Identify a demand curve and a supply curve • Explain supply, quantity supply, and the law of supply • Explain equilibrium, equilibrium price, and equilibrium quantity First let’s first focus on what economists mean by demand, what they mean by supply, and then how demand and supply interact in a market. 44 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col11858/1.4 Demand for Goods and Services Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants—a consumer may be able to differentiate between a need and a want, but from an economist’s perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand. What a buyer pays for a unit of the specific good or service is called price. The total number of units purchased at that price is called the quantity demanded. A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded.
eBook - PDF- Irvin B. Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Demand represents the choice-making behavior of consumers, while supply represents the choices of producers. The chapter begins by looking closely at demand and then supply. Finally, it combines these forces to see how prices and quantities are determined in the marketplace. Market demand and supply analysis is the basic tool of microeconomic analysis. IN THIS CHAPTER, YOU WILL LEARN TO SOLVE THESE ECONOMICS PUZZLES: • What is the difference between a “ change in quantity demanded ” and a “ change in demand ” ? • Can Congress repeal the law of supply to control oil prices? • Does the price system eliminate scarcity? Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. ............................................................................................................................................................................................. ............................................................................................................................................................................................. 3-1 THE LAW OF DEMAND Economics might be referred to as “ graphs and laughs ” because economists are so fond of using graphs to illustrate demand, supply, and many other economic concepts. Unfor-tunately, some students taking economics courses say they miss the laughs. Exhibit 1 reveals an important “ law ” in economics called the law of demand . The law of demand states there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus.
eBook - PDF- A. Knoester, A.H.E.M. Wellink(Authors)
- 2014(Publication Date)
- North Holland(Publisher)
The theory of factor demands under uncertainty should then exhibit this role of profitability. This is the theory I tried to elaborate, taking uncertainty of future demand and irreversibility of investment as the main reasons explain-ing why profitability matters. PROFITABILITY AND FACTOR DEMANDS UNDER UNCERTAINTY 77 Expected demand for goods Productive capacity Profitability Capital intensity Relative factor costs Figure 1 It should be noted at this stage that, being concerned with medium-term phenomena, I shall neglect here whatever limit the availability of owned or bor-rowed funds may impose on investment. Past profits are then not important as a source of finance but only to the extent that they explain expected pro-fitability. In order to introduce my results, I shall use a teaching tool that Tinbergen particularly likes, the arrow scheme representing the directions of causation. My discussion will concern the exact meaning and validity of the vision presented by Figure 1, according to which productive capacity would depend on profitability and the expected level of the demand for goods, whereas capital intensity would depend on relative factor costs. Three main conclusions can be drawn from the analysis of a static partial equilibrium model of a representative firm, a model that I shall precisely define in a moment. In the first place one must be careful when speaking of the role of probabili-ty. The value taken by Tobin's q is endogenous, since it depends not only on ex-ogenous prices and costs but also on capital intensity and on the expected rate of capacity utilization, which varies with productive capacity. Hence, com-parative statics properties must take as exogenous not the change in q, but the direct impact that changes in prices and factor costs have on q or, better, an ap-propriately defined indicator of this impact.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
3.2 • Shifts in Demand and Supply for Goods and Services 63 FIGURE 3.15 Factors That Shift Supply Curves (a) A list of factors that can cause an increase in supply from S 0 to S 1 . (b) The same factors, if their direction is reversed, can cause a decrease in supply from S 0 to S 1 . Because demand and supply curves appear on a two-dimensional diagram with only price and quantity on the axes, an unwary visitor to the land of economics might be fooled into believing that economics is about only four topics: demand, supply, price, and quantity. However, demand and supply are really “umbrella” concepts: demand covers all the factors that affect demand, and supply covers all the factors that affect supply. We include factors other than price that affect demand and supply by using shifts in the demand or the supply curve. In this way, the two-dimensional demand and supply model becomes a powerful tool for analyzing a wide range of economic circumstances. 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process LEARNING OBJECTIVES By the end of this section, you will be able to: • Identify equilibrium price and quantity through the four-step process • Graph equilibrium price and quantity • Contrast shifts of demand or supply and movements along a demand or supply curve • Graph demand and supply curves, including equilibrium price and quantity, based on real-world examples Let’s begin this discussion with a single economic event. It might be an event that affects demand, like a change in income, population, tastes, prices of substitutes or complements, or expectations about future prices. It might be an event that affects supply, like a change in natural conditions, input prices, or technology, or government policies that affect production. How does this economic event affect equilibrium price and quantity? We will analyze this question using a four-step process. Step 1. Draw a demand and supply model before the economic change took place.
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