5.2 Changes in Factor Demand and Supply

Factor markets are dynamic, influenced by incentives and constraints, affecting both factor demand and supply.

The factor demand is based on: D = MRP = P \times MPL

Thus, changes in either P (price of goods) or MPL (marginal product of labor) will shift the demand curve.

Change in Price of Goods Being Produced: An increase in the product price increases VMPL (value of marginal product of labor) and demand (D), whereas a decrease in price decreases VMPL and D. For instance, if the market price of cookies increases, the demand for labor in cookie production increases.
Change in Supply of other Factors of Production: If a farm acquires more land, each worker has more land to work with, increasing MPL and VMPL. Conversely, reducing land decreases MPL and VMPL.
Change in Technology: Technology can shift factor demand in different directions.
- Substitute Technology: This can decrease demand. For example, the invention of tractors reduced the demand for plow horses, or a cookie-making robot reduces the demand for human bakers.
- Complementary Technology: This can increase MPL and D. For instance, a new thermo-oven increases the number of cookies each baker can produce, increasing MPL.

Changes in Preferences and Social Norms: Shifts in preferences and social norms can increase or decrease the willingness of workers to work at a given wage. For example, in 1950, 34% of women were employed, compared to 60% in 2000. Catalysts for this change include labor-saving home appliances, urbanization, and higher female education levels.
Changes in Population: Changes in population size affect the labor supply curve, influenced by birth rates, death rates, immigration, and emigration. The U.S. labor force grows by approximately 0.5% per year, matching the country's population growth rate, leading to a rightward shift in the labor supply curve.
Changes in Alternative Opportunities: The labor supply in one market depends on opportunities in other markets. Teaching, once a primary occupation for educated women, saw a leftward shift in its supply curve as other professions opened up to women in the 1960s.
Changes in Wealth: Increased wealth can lead workers to buy more leisure, reducing their work hours or leading to early retirement. For example, the percentage of Americans aged 16-19 in the summer workforce decreased from 71% in 1980 to 36% in 2019, partly due to increased household affluence.
Changes in the Supply of Other Factors of Production: For example, the supply of farmland decreasing due to a drought, or the supply of delivery trucks decreasing because of a shortage of semiconductor chips.

Substitute factors: These are factors where people or machines perform the same job, so only one is needed. For example, ATMs that replace bank tellers.
Complementary factors: These are factors where capital and labor work together. For example, a lawn service where each worker needs a lawnmower to be effective.