Determinants of Factor Demand

Marginal Productivity Theory: The marginal productivity theory states that firms will hire additional units of an input until its marginal product (the additional output produced by one more unit) equals its price.

Substitutes in Production: Substitutes in production refer to inputs that can be used interchangeably in the production process. For example, if labor becomes more expensive, firms may substitute it with capital.

Complements in Production: Complements in production are inputs that are used together in the production process. For example, if a firm uses both labor and machinery to produce goods, they are complements in production.