Study Exercises 13 and 14 at the end of this chapter to work through an
example of a firm hiring workers in a factory that makes apple pies.
Elasticity of the Firm’s Factor Demand Curve
The elasticity of demand for a factor is the same basic concept as the
elasticity of demand for any product that we first saw in Chapter 4. The
more elastic the demand for a factor, the greater is the change in quantity
demanded in response to a change in the price of that factor. The price
elasticity of demand for a factor depends on:
- The Elasticity of Demand for the Firm’s Product
A competitive tomato farmer facing a highly elastic demand curve (almost
horizontal) for her tomatoes will have very little ability to pass on, in the
form of higher prices, the additional costs associated with paying a higher
wage to her workers. This farmer is therefore quite sensitive to changes in
the prices of the factors of production that she uses to grow tomatoes.
Any increase in the wage, for example, will thus have a relatively large
decrease in her quantity demanded for workers. In contrast, a farmer with
a special piece of land growing a rare type of local mushrooms might
have considerable power in his product market; in this case, the farmer
could pass some part of cost increases on to consumers and would thus
have a less elastic demand for the factors of production he uses.
- The Firm’s Ability to Substitute Between Factors