Factor Demand and Factor Supply

2 Key excerpts on "Factor Demand and Factor Supply"

• 

  eBook - ePub

  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  14 The Factor Market

  The 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.

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• 

  eBook - ePub

  Organisations and the Business Environment

  • Tom Craig, David Campbell(Authors)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  Supply and Demand DOI: 10.4324/9780080454603-17

  Learning Objectives

  After studying this chapter, students should be able to describe:

  • the features and determinants of demand;
  • what is meant by the demand schedule and the demand curve;
  • the features and determinants of supply;
  • what is meant by the supply schedule and the supply curve;
  • the mechanisms of price determination and disequilibrium;
  • the principles of price and income elasticities of demand;
  • the principles of cross elasticity of demand;
  • the features of factor markets, particularly the labour market.

  17.1 Demand

  Demand and Effective Demand

  Whenever we express an interest in purchasing a good or service, we are indicating a demand. Note though, that it is possible to demand a product without actually buying it. You may demand a new motorcar, but for various reasons (e.g. poverty), you are unable to express your demand in the form of a purchase. It is for this reason that economists distinguish desire for a product with its effective demand. Producers of goods and services are less concerned with how badly you desire their products, and more with how many you will actually buy and at what price.

  Effective demand, as distinct from demand, has three components:

  • the actual quantity demanded of a good or service,
  • the time period over which the quantity is demanded,
  • the price at which the quantity will be demanded over the time period.

  Effective demand thus takes into account the customer’s ability to buy, not just the desire – however intense that may be. We may say, therefore, that the total demand for product A is 10,000 units a month if the price is 45 pennies per unit. Thus all three components must be in place before the demand can be said to be effective.

  The Determinants of Demand

  In seeking to answer the question why

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