Micro CHAPTER 5.2:

Changes in Factor Demand and Factor Supply

CHAPTER SUMMARY

Just like many things can influence product supply & demand, there are also determinants of factor demand (demand for resources). These determinants can be a bit more complicated, because they are often connected to a chain of events rather than just a single change. Here are some things that can influence factor demand:

Price of substitute resources - Just like with product demand, if a business can use either aluminum or steel for production, and the price of aluminum falls, then demand for steel will fall because some firms will switch to using aluminum.
Price of complementary resources - If a firm uses both rubber and aluminum to make golf clubs, and the price of rubber goes up (causing the quantity of rubber demanded to fall), then firms' demand for aluminum will also fall, since they can only use it if they are buying rubber too.
Level of productivity - If a firm begins using some new technology that improves the productivity of their workers, the workers' marginal revenue product increases. This means that they will probably want to hire more workers than before, since marginal resource cost stayed constant, but marginal revenue product increased. However, if the technology replaces workers, it can also mean that the marginal product of additional workers is very low, decreasing demand.
Level of product demand - If golf becomes more popular, demand for golf clubs will increase, driving up the equilibrium price and quantity in the product market. The increase in quantity produced for the product market will go along with an increase in demand for the resources used to make those clubs.

See the charts below for a few examples of how these factors can influence demand.

Similarly, factor supply can also be influenced by several determinants.

Number of qualified workers - the supply of workers is closely tied to the number of workers available. If millions of refugees from a civil war enter a country, that country will see an increase in supply of workers.
Government regulation - If the government relaxes restrictions to enter a profession, like allowing teachers to teach without a license, then supply of labor in that field would increase.
Worker preferences - As society changes, so do the preferences of workers. When millions of women entered the workforce, this drastically increased the supply of labor. Now, when many people are refusing to go back to work in offices, the available labor supply decreases.

See the charts below for a few examples of how these factors can influence supply.

The results of these shifts in supply & demand are exactly the same as in product markets - the only difference is that instead of prices for products, we are now talking about wages (for labor) or prices (for resources).

CHAPTER VIDEOS

(Just section 5.2)

CHAPTER READINGS

Changes in Factor Demand and Factor Supply | FiveableLearn what the three determinants are for factor demand, the three for factor supply, and the determinants that change both labor demand and labor supply!

Factor Market Supply and Demand - ReviewEcon.comGet an overview of labor market supply and demand as well as an explanation of firm's marginal factor cost. For AP, IB, or Collge Microeconomics.

CHAPTER PRACTICE

Albert | Learn by doing | Grades 5-12 reading, writing, math, science, and test prepAlbert provides students with personalized learning experiences in core academic areas while providing educators with actionable data. Leverage world-class, standards aligned practice content for AP, Common Core, NGSS, SAT, ACT, and more.

EXTENSION

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