Economics
Factor Demand Curve
The factor demand curve represents the relationship between the quantity of a factor of production, such as labor or capital, and the price of that factor. It illustrates how the quantity of the factor demanded by firms changes as the price of the factor changes, holding other factors constant. The factor demand curve slopes downward due to the law of diminishing marginal returns.
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9 Key excerpts on "Factor Demand Curve"
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
THE DEMAND FOR FACTORS OF PRODUCTION 481 Copyright 2014 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. The Demand for Inputs versus the Demand for Output The construction of a firm ’ s demand curve for a factor is similar in spirit to that of the consumer ’ s demand curve for an output, but it is also more complicated. The key difference is that a consumer has a budget constraint. Given prices, we can determine that budget constraint and find the basket he consumes. A firm, by con-trast, has no budget constraint. Instead, it has an infinite family of isocost lines, and it could choose to operate on any one of them. In order to find out what basket of inputs the firm chooses, we must refer to another market, the market for output (that is, we must use panel B in Exhibit 15.5). The firm ’ s demand curve for a factor of production is called derived demand , because it is partly derived from informa-tion external to the market for the factor itself. A Change in the Wage Rate Continuing with the example of Exhibit 15.5, suppose that the price of labor rises, to P 0 L . This causes all of the isocosts to become steeper, as in panel A of Exhibit 15.6, yielding a new expansion path shown in blue. The new expansion path leads to new (long-run) total and marginal cost curves. Suppose that the new marginal cost curve is the curve LRMC 0 in panel B of Exhibit 15.6. Then the firm reduces output to Q 1 and chooses an input basket where the Q 1 -unit isoquant is tangent to an isocost. The new basket is the one labeled B in panel A of Exhibit 15.6.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
1–17. • Demand and Supply Curves 19 To use demand curves correctly, we must distinguish clearly between situations that involve a movement along a given demand curve and those that involve a shift in demand. A movement along a given demand curve occurs when the quantity demanded changes in response to a change in price of a particular good while the other factors affecting consump- tion are held constant. This is not a change in the demand curve. An example would be the movement from point A to point B along demand curve D in Figure 2.2. A shift in demand, a movement of the curve itself, occurs when there is a change in factors besides price such as income, preferences, and the price of related goods, affecting the quantity demanded at each possible price. An example is the movement of the entire demand curve from D to D′ in Figure 2.2. The Supply Curve On the supply side of a market, we are interested in the amount of a good that business firms will produce. According to the law of supply, the higher the price of a good, the larger the quantity firms want to produce. As with the law of demand, this relationship will necessarily hold only if other factors that affect firms’ decisions remain constant when the price of the good changes. The amount firms offer for sale depends on many factors, including the technological know-how concerning production of the good, the cost and pro- ductivity of relevant inputs, expectations, employee–management relations, the goals of firms’ owners, the presence of any government taxes or subsidies, and so on. The price of the good is also important because it is the reward producers receive for their efforts. The supply curve summarizes the effect of price on the quantity that firms produce. Figure 2.3 shows a hypothetical market supply curve for flat-screen TVs. For each pos- sible price the supply curve identifies the sum of the quantities offered for sale by the sepa- rate firms.
- 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)
This is the primary difference between the construction of the market demand for a good and that for a factor of production. This difference derives from the nature of the demand for a factor input where that demand is described as a derived demand . It has previously been shown that the demand for a factor of production is derived from the marginal physical productivity of that factor and the price (or marginal revenue) of the product it produces ( VMP L or MRP L ). In moving from the short-run (single variable factor) to the long-run (several variable factors) factor demand, there are shifts in demand due to the effect on the marginal physical productivity of the factor. In moving from the individual producer to the market, there are also shifts in the demand curve for a factor, this time because of the effect on the price (or marginal revenue) of the product produced by the factor. The shift in the factor’s demand curve occurs because, in the total market, the changes in the factor input’s price affect the use of the factor, the level of output and hence, the price of the product . The individual producer’s demand curve is based on the supposition that the producer’s decisions cannot affect the price of the output. But consider what happens when all producers together respond to a fall in the price of an input at the same time. To illustrate this, consider a fall in the price of the input labour ( L ). All producers will utilize more labour and all will increase output. The combined increase in output causes a fall in the price (and marginal revenue) of the output. This fall in price of output (good x ) causes the VMP L (i.e. MPP L · 1 P x ) curve to shift leftwards (inwards). This is illustrated in Figure 14.8. Using Figure 14.8, when the wage rate ( w ) is $15.00, the demand by all producers of good x for the factor input labour ( L ) is OL 1 on VV . The horizontal summation across all 411
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
Using this knowledge, a producer, with adequate knowledge of the production function (technology) and the market (price or marginal revenue information) knows how to achieve profit maximization. This could mean the difference between survival in a market or extinction, or between great success in a market or marginal survival. Knowledge of the rules of the games gives a greater chance of success so vital to producers facing greater global competition.14.4 Market Demand for a Single Input
14.4.1 The market demand curve for labour under perfect competition
From the single producer to the market
In making the transition from the factor demand of the single producer/firm to the factor demand of the market, the major consideration is that: The Factor Demand Curves for the individual producers (firms) cannot be summed to find market demand for a factor of production .This is the primary difference between the construction of the market demand for a good and that for a factor of production. This difference derives from the nature of the demand for a factor input where that demand is described as a derived demand . It has previously been shown that the demand for a factor of production is derived from the marginal physical productivity of that factor and the price (or marginal revenue) of the product it produces (VMPLorMRPL).In moving from the short-run (single variable factor) to the long-run (several variable factors) factor demand, there are shifts in demand due to the effect on the marginal physical productivity of the factor. In moving from the individual producer to the market, there are also shifts in the demand curve for a factor, this time because of the effect on the price (or marginal revenue) of the product produced by the factor.The shift in the factor’s demand curve occurs because, in the total market, the changes in the factor input’s price affect the use of the factor, the level of output and hence, the price of the product
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.
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- Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
............................................................................................................................................................................................. ............................................................................................................................................................................................. 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. The law of demand makes good sense. At a “ sale, ” consumers buy more when the price of merchandise is cut. EXHIBIT 1 An Individual Buyer ’ s Demand Curve for Blu-rays Bob ’ s demand curve shows how many Blu-rays he is willing to purchase at different possible prices. As the price of Blu-rays declines, the quantity demanded increases, and Bob purchases more Blu-rays. The inverse relationship between price and quantity demanded conforms to the law of demand. 20 5 Price per Blu-ray (dollars) 16 12 8 4 0 10 15 20 Quantity of Blu-rays (per year) A C D B Demand curve An Individual Buyer ’ s Demand Schedule for Blu-rays Point Price per Blu-ray Quantity demanded (per year) A $20 4 B 15 6 C 10 10 D 5 16 Law of demand The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to pur-chase in a defined time period, ceteris paribus. CHAPTER 3 | Market Demand and Supply 59 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
Likewise, a consumer who is able but unwilling to buy a product is also not considered to be part of market demand. Quantity demanded is defined to be the amount of a product that buyers are willing and able to purchase at a specific price. To summarize, the difference between demand and quantity demanded for a product is that demand refers to the amount potential buyers are both willing and able to purchase at all prices, and quantity demanded refers to the amount potential buyers are willing and able to purchase at a specific price. Once these two terms are understood, it becomes possible to introduce the law of demand. One of the most basic concepts in economics is the law of demand. The law of demand is simply an observation of a consumer's general response to changes in a product's price. As price decreases, consumers tend to be willing and able to purchase more of a product, and as price increases, consumers tend to be willing and able to purchase less of a product. To help visualize economic concepts, econo-mists often try to illustrate the concepts using graphs. The law of demand is illustrated in Figure 7.1. The lines labeled D, and D 2 are referred to as demand curves. The lines are drawn here as linear functions to enhance the simplicity of the graph, but these lines could also be drawn as curved lines that are convex to the origin. A change in demand is illustrated by a shift in the loca-tion of the entire curve. In Figure 7.1, demand is said to increase if demand changes from D, to D 2 . An increase in demand means that consumers are willing and able to pur-chase more at every price. For example, the movement from point A to C represents an increase in demand because at point A, consumers are willing to buy Q x , but Q 2 at point C.
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