Markets for Factors of Production

Markets for Factors of Production - produce. Labor, land,...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: produce. Labor, land, machines, raw materials, etc. are purchased because they are useful in the production of goods and services. For example, the demand for steel depends upon the demand for products (like automobiles) VI. Markets for Factors of Production (Inputs) which have steel as a component. This means that changes The demands for for of production (or will are derived from the demand for in the demand factorsautomobiles inputs) affect the demand of the goods they are used to steel. If theey are usefulproduce. Labor, land,goods and services. For recession, demandin theautomobiles falls during a example, the demand for production of machines, raw materials, etc. are purchased because th thenor steeldemand for steel willproducts (like automobiles), which have steel as a f the depends upon the demand for fall. component. This means that changes in the demand for automobiles will affect the demand for steel. If the demand for automobiles falls during a recession, then the demand T steel will fall. for he demand for an input (just like the demand for goods The by consumers) like the demand for goods bought boughtdemand for an input (justis downward sloping. by consumers) is downward sloping. Example: Demand for Steel. When the price of steel rises, two things happen: A. Firms using steel replace steel with substitutes for steel in production processes. (For example, automobile manufacturers may use aluminum and plastics instead of steel for some automobile parts.) B. Costs of production of goods using steel increase o increase in product prices o decrease in quantity of the products demanded o decrease in quantity of steel demanded to produce these products. (Example, when the price of steel rises, the prices of automobiles rise. This increase in the price of cars reduces the quantity of automobiles demanded. If fewer automobiles are demanded, then the quantity of steel used to produce automobiles will fall.) Application: Application: What is the effect of an economic boom on the What is the e and an e quantity o the price of steel and the quantity of steel price of steel ffect of theconomic boomofn steel produced and sold? produced and sold? Answer: An economic boom raises the demand for industries like automobiles, construction, etc. that use steel. Thus, the demand for steel rises from Do to D1. The price of steel and the quantity of steel bought and sold both increase. Question: What is the effect of a decline in the price of oil on wage rates and employment of coal miners? The following diagram shows the initial demand for coal miners (curve Do) and the supply of coal miners (So). The higher the wage rate of coal miners, the fewer miners that coal companies want to hire, i.e. the demand for miners is downward sloping. The supply Answer: is upward sloping. The higherraises the of miners, thefor industries of curve An economic boom the wage rate demand larger the number people who want to work as coal miners. The that use steel. Thus, the like automobiles, construction, etc. initial equilibrium wage rate of coal miners is Wo demand and the initial number of coal miners D1.numberAt a wage who want and as for steel rises from Do to hired is Qo. of peopleof steel to work of The price of Wo, the number miners that firms want to hire exactly equals the the quantity of steel bought and sold both increase. miners. number of coal miners hired is Qo. At a wage of Wo, the number of miners that firms want to hire exactly equals the number of people who want to work as miners. Answer: A decrease in the price of oil lowers the demand for coal, as firms use more oil and less coal for fuel. Consequently, the demand for coal miners falls (say to D1). We would expect the equilibrium wage rate would fall (to W1) and the level of employment to fall to Q1. © Bryan L. Boulier, 2010. All rights reserved. ...
View Full Document

Ask a homework question - tutors are online