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Changes in product demand:
[Remember: resource demand is a 'derived demand' from its product]
- Condition: other things equal
- Product demand ↑, D for resource involved ↑ (direct relationship)
- E.g. The demand for new houses drive up house prices, causing more demand for construction workers and an increase in their wages.
Changes in productivity
- Condition: other things equal
- Resource productivity ↑, demand ↑ (direct relationship)
- 3 ways of altering resource productivity:
- Quantities of other resources
- Q of capital + land used w/ labor ↑, MP ↑, productivity of labor ↑
- Technological advances
- Quality of capital + land used w/ labor ↑, MP ↑, productivity of labor ↑
- Quality of variable resource
- Quality of labor ↑, MP ↑, productivity of labor ↑
Changes in the prices of other resources
[Depends on whether labor and capital are substitutes/complements in production]
- E.g. a receptionist (labor) is substitutable for an answering machine (capital)
- Substitute Effect
- Firm buy more of input whose P relatively low + buy less of input whose P has relatively high
- Output Effect
- – PCAPITAL ↓ → costs ↓ → output ↑ → DALL RESOURCES ↑ → DLABOR ↑
- Net Effect:
- If substitute effect>output effect, decrease in price for capital decreases demand for laborI
- If output effect>substitute effect, decrease in price for capital increases demand for labor
- Labor and capital must be used in fixed proportions e.g. one man operates one machine
- Output effect
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