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๐Ÿ’ธย  Unit 1: Basic Economic Concepts

5.2 Changes in Factor Demand and Factor Supply



โฑ๏ธย ย 3 min read

written by

jeanne stansak

November 11, 2020

Unit 5: Factor Markets

5.2: Changes in Factor Demand and Factor Supply

Factor Demand

There are three components of resource demand that will change the demand for the resources. We could refer to these as the determinants of resource demand.

  1. The first determinant is the price of related inputs. In this determinant, we are referring to substitute resources and complementary resources that are used in the production of goods and services. If the price of one resource becomes more expensive, the firm will increase their demand for the substitute resource. For example, if the price of copper piping increases, home builders will more willing to demand plastic piping. In looking at complementary resources, we can look at the production of soft drinks. Both aluminum and sugar are used in the production of soft drinks. If the price of aluminum increases, then we would see the demand for sugar decrease since both products are used to produce soft drinks.

  2. The second determinant of resource demand is a change in productivity. Let's take a situation where a new technique is developed that cuts production time in half. Since labor productivity has increased, each worker can make a greater quantity of the goods than they used to. This leads to each worker generating a greater marginal revenue product which increases their value to the firm or business. As a result, this increases the demand for labor.

  3. The third determinant of resource demand is a change in the demand for the good or service. For example, if there is an increase in the demand for pizza, then there will be greater demand for all the resources that are involved in the production of pizza, including cheese, sauce, dough, and workers. Resource demand can also change when the price of a product changes. For example, if the price of pizza decreases, then the worker who is trained to make a pizza generates a smaller MRP (because MRP = MP x price), so the demand for these workers will decrease.

Let's look at some scenarios on graphs:



Factor Supply

Just like with the demand for resources, there are several things that can change the supply of resources. When we are looking at the supply of resources, we generally focus on workers.

The first determinant of the supply of workers is the number of qualified workers that are available in a particular industry. This can be influenced by immigration, education, training, and abilities. Here are some examples of this determinant:

  • If a country enacts stricter immigration laws than that will shift the labor supply to the left because of the smaller pool of workers.

  • The number of graduates with engineering degrees soar. This would cause the labor supply to shift right.

The second determinant of the supply of workers is government regulations and licensing. Here are some examples of this determinant:

  • If the government establishes a certification process that makes it harder to be an electrician than we would see the supply of electricians decrease shifting the labor supply curve to the left.

The third determinant is personal values regarding leisure time and societal roles. Here are some examples of this determinant.

  • The increase in the labor force, especially women, during WWII because people saw it as a patriotic duty to help produce the goods that would help in the war efforts. This would increase the labor supply and shift the curve right.

  • Low-skill workers decide that working at minimum wage isn't worth their time. This would shift the labor supply curve to the left due to the decrease in the amount of workers.

Let's look at some scenarios on graphs:


Changes in the Labor Market Equilibrium

Remember there are determinants that change both labor demand and labor supply. When these determinants occur, there is a change in the equilibrium of the labor market.


Let's look at an example that changes labor demand and an example that changes labor supply.


continue learning

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