Figure 13-3 The Creation and Erosion of Temporary Factor-Price
Differentials
lessen and eventually to disappear. This adjustment process is illustrated
in Figure 13-3. How long this process takes depends on how easily
workers can be reallocated from one industry to the other—that is, on the
degree of factor mobility.
The mobility of factors leads to the erosion of temporary differentials
in factor prices. The two figures show the markets for some factor of
production (land, labour, or capital) in the airline and railway industries.
Suppose the initial equilibrium has the factor receiving the same price in
both industries units are employed in the airline industry
and units are employed in the railway industry.
An increase in demand for air travel leads to an increase in demand for
factors in the airline industry. The demand curve shifts to and factor
prices in that industry rise to As factor prices in the airline industry
(wA=wR).QA
QR
D′A
w′A.