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Demand Determinants
We shall now explain those causes which bring about changes in the factor demand. In other words, we shall discuss those factors which cause shifts in the whole MRP curve of the factor. These basic determinants of factor demand, the variations in which will bring about shifts in factor demand curve, are explained below:
1. Demand for the product: as explained above, demand is a derived demand, derived from the demand for the product. The demand for a factor, therefore, depends upon demand for the product it help to produce. As already explained, the MRP curve is the demand curve for the factor. Any change in the demand for the product will cause shift in the whole marginal demand, given the supply which is obtained will raise its price and marginal revenue. Hence the entire VMP curve which is obtained by multiplied marginal physical product with price of outputs will shift outward to the right when price of product rises following the in the demand for the product. On the other hand, decrease in the demand in the demand for the product, given the product supply, will lower its price. As a result, the VMP or demand curve of the factor will shift to the left.
2. Productivity of the factor: another determinant of the demand for a factor is its productivity. Like the changes in price changes in marginal physical productivity will also cause a shift the entire MRP or demand curve of labour to the right, it may also be pointed out that historically we have experienced only increase in the physical productivity, except under exceptional circumstances, has not been noticed. There are mainly three ways in which the marginal utility of the factor can be increased. First, the quality of the factor may be improved. For instance, the labour productivity can be increased by making labour productivity quality of the factor by enhancing its marginal productivity will cause outward shift in the factor demand curve.
3. Prices of other factors: just as the demand for a commodity depends upon the prices of other related commodities, demand for a factor also depends upon the prices of other related factors. But the effect of the changes in the price of related factors on the demand for a given factor would have different effects depending upon whether these related factors are substitutes or complements for the given factor.
Suppose two factors, labour and machinery, are used in the production of a commodity. Now, labour and machinery are largely substitutes. We want to consider the effect on the demand for labour as a result of change in the price of machinery. If the price of machinery falls so that machinery becomes relatively cheaper than labour, there would be large substitutes of machinery for labour. Since machinery is now relatively cheaper than labour, it will pay the employer to use more machinery and less labour. Therefore as a result of change in the price of machinery, demand for labour will fall and machinery will be used in place of labour. Thus the change in the price of machinery will have, what is called substitution effect on the demand for labour. As a result of the substitution effect of the fall in the price of machinery, the demand curve of the labour will shift to the left. The extent to which the demand for labour will fall depends upon the extent to which it is possible to substitute machinery for labour.
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1. Demand for the product: as explained above, demand is a derived demand, derived from the demand for the product. The demand for a factor, therefore, depends upon demand for the product it help to produce. As already explained, the MRP curve is the demand curve for the factor. Any change in the demand for the product will cause shift in the whole marginal demand, given the supply which is obtained will raise its price and marginal revenue. Hence the entire VMP curve which is obtained by multiplied marginal physical product with price of outputs will shift outward to the right when price of product rises following the in the demand for the product. On the other hand, decrease in the demand in the demand for the product, given the product supply, will lower its price. As a result, the VMP or demand curve of the factor will shift to the left.
2. Productivity of the factor: another determinant of the demand for a factor is its productivity. Like the changes in price changes in marginal physical productivity will also cause a shift the entire MRP or demand curve of labour to the right, it may also be pointed out that historically we have experienced only increase in the physical productivity, except under exceptional circumstances, has not been noticed. There are mainly three ways in which the marginal utility of the factor can be increased. First, the quality of the factor may be improved. For instance, the labour productivity can be increased by making labour productivity quality of the factor by enhancing its marginal productivity will cause outward shift in the factor demand curve.
3. Prices of other factors: just as the demand for a commodity depends upon the prices of other related commodities, demand for a factor also depends upon the prices of other related factors. But the effect of the changes in the price of related factors on the demand for a given factor would have different effects depending upon whether these related factors are substitutes or complements for the given factor.
Suppose two factors, labour and machinery, are used in the production of a commodity. Now, labour and machinery are largely substitutes. We want to consider the effect on the demand for labour as a result of change in the price of machinery. If the price of machinery falls so that machinery becomes relatively cheaper than labour, there would be large substitutes of machinery for labour. Since machinery is now relatively cheaper than labour, it will pay the employer to use more machinery and less labour. Therefore as a result of change in the price of machinery, demand for labour will fall and machinery will be used in place of labour. Thus the change in the price of machinery will have, what is called substitution effect on the demand for labour. As a result of the substitution effect of the fall in the price of machinery, the demand curve of the labour will shift to the left. The extent to which the demand for labour will fall depends upon the extent to which it is possible to substitute machinery for labour.
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