Unit 5: Factor Markets 5.2 Changes in Factor Demand and Factor Supply
Learning Objectives
Understand the shifters of resource demand.
Identify factors affecting the labor supply curve.
Three Shifters of Resource Demand
Changes in Product Demand
Price increase of a product leads to increased Marginal Revenue Product (MRP).
Results in increased labor hiring.
Changes in Productivity
Technological advancements increase marginal product and MRP.
Firms become more profitable, leading to increased resource employment.
Changes in Prices of Other Resources
Substitutes: Decrease in price of machinery reduces MRP of labor.
Complements: Decrease in price of related materials increases demand for labor (e.g., lumber and construction workers).
Perfectly Competitive Labor Market
Composed of many firms hiring workers with similar skills.
Firms are wage takers and must pay market-determined wages.
Supply curve of labor is horizontal.
Minimum Wage Impact
An effective minimum wage (price floor) raises wage but decreases quantity of labor hired.
Results in increased labor supply but decreased labor demand.
Shift in Labor Supply
An increase in labor supply lowers market wages due to surplus; a decrease raises wages due to scarcity.
Shift in the supply curve establishes a new equilibrium for wage and employment levels.
Determinants of Factor Supply
Changes in Tastes/Social Norms: Affect perceptions of work and leisure.
Alternative Opportunities: Higher wages in other fields shift supply left.
Immigration: Directly increases or decreases labor supply.
Demographic Changes: Population size/age affects labor supply.
Education/Training Requirements: Changes in qualifications impact workforce availability.
Practice Questions
Which change does NOT shift demand for a production factor? (Answer: D)
Effect of new management techniques on labor supply (Answer: C).
Condition causing leftward shift in demand curve for a production factor (Answer: B).
Answer Key
Practice 1: D
Practice 2: C
Practice 3: B
Practice 4: C
Practice 5: B