equilibrium is determined by and The equilibrium factor price is
the equilibrium quantity of the factor is and total factor income is
the area.
In part (i), an increase in demand for the factor shifts the demand curve to
The equilibrium factor price rises to and quantity increases to
Since both price and quantity have increased, the total income earned by
the factor clearly increases.
In part (ii), an increase in the supply of the factor shifts the supply curve
to The equilibrium factor price falls to , but the quantity increases
to Since price falls but quantity rises, the effect on total factor income
is unclear. If demand for the factor is inelastic, total factor income will
fall; if demand is elastic, total factor income will rise.
Changes in factor markets can occur either because of a change in
demand for the factor or because of a change in the supply of the factor,
or both. Part (i) of Figure 13-2 illustrates a case in which an increase in
demand for a factor leads to a rise in that factor’s price and an increase in
total income earned by that factor. What could cause such a change?
Recall that the market demand curve for any factor comes from the many
firms’ MRP curves for that factor. An increase in the productivity of that
factor (or an increase in demand for the products using that factor) would
lead to a rightward Shift in the MRP curves and thus to an increase in the
market demand for the factor. Indeed, increases in productivity account
for a gradual but ongoing increase in the demand for most factors of
production.
Part (ii) of Figure 13-2 shows that an increase in the supply of some
factor of production leads to a decline in that factor’s equilibrium price
and an increase in the quantity of the factor employed. (The total income
D 0 S 0.
w 0 , Q 0 ,
w 0 Q 0
D 1. w 1
S 1. w 1
Q 1.