Lectures in Microeconomics-Charles W. Upton Demand Change to Factor Price Change

Lectures in Microeconomics-Charles W. Upton

Demand Change to Factor Price Change

DD’

SLRS’SRSSR

p3

p2

p1

q1 q2 q3

Movement along LR

supply curve.

Price goes up, even though industry is perfectly

competitive and all firms

are alike.

Demand Change due to Factor Price Change

An Endogenous Change

pmin SLR

SSR

D

Now let’s talk about how a

change in demand can affect factor

prices.

Demand Change due to Factor Price Change

An Endogenous Change

pmin SLR

SSR

D

Demand Change due to Factor Price Change

An Endogenous Change

pmin SLR

SSR

D

Demand Change due to Factor Price Change

An Endogenous Change

pmin SLR

SSR

D

p1

Demand Change due to Factor Price Change

An Endogenous Change

pmin SLR

SSR

D

p1

Demand Change due to Factor Price Change

An Endogenous Change

pmin SLR

SSR

D

p1

No change in factor prices

means no long run change in product price.

Demand Change due to Factor Price Change

An Endogenous Change

pmin SLR

SSR

D

p1

No change in factor prices

means no long run change in product price.

But it does not have to be this

way.

Demand Change due to Factor Price Change

The demand for lumber

• Lumber is a highly competitive business, with a key factor of production: timber.

Demand Change due to Factor Price Change

The demand for lumber

• Lumber is a highly competitive business, with a key factor of production: timber

Lumber = processed wood ( 2x4, etc)

Timber = trees ready for processing

Demand Change due to Factor Price Change

The demand for lumber

• Lumber is a highly competitive business, with a key factor of production: timber.

• A change in the demand for lumber can have feedback effects on the price of timber.

Demand Change due to Factor Price Change

The demand for lumber

• Lumber is a highly competitive business, with a key factor of production: timber.

• A change in the demand for lumber can have feedback effects on the price of timber.

This is the case of a pecuniary external

diseconomy.

Demand Change due to Factor Price Change

The Demand for Lumber and Timber

Lumber

D

Demand Change due to Factor Price Change

Ignoring Timber Prices

Lumber

D

S

Demand Change due to Factor Price Change

An Increase in Demand

Lumber

D

S

D`

Demand Change due to Factor Price Change

Complication of SR supply curve

Lumber

D

S

D`

Demand Change due to Factor Price Change

Complication of SR supply curve

Lumber

D

S

D`

Demand Change due to Factor Price Change

Complication of SR supply curve

Lumber

D

S

D`

Demand Change due to Factor Price Change

Complication of SR supply curve

Lumber

D

S

D`

But net effect is no change in price of

lumber. A lumber mill is a lumber

mill.

Demand Change due to Factor Price Change

The Demand for Lumber and Timber

Lumber Timber

D D

S

Demand Change due to Factor Price Change

The Demand for Lumber and Timber

Lumber Timber

DD’

D’

D

S

Demand Change due to Factor Price Change

The Demand for Lumber and Timber

Lumber Timber

DD’

D’

D

SIf lumber production is increasing due to a

demand shift, there is a shift in the demand for timber. Timber prices

will be going up.

Demand Change due to Factor Price Change

Effect of Price Changes

p*

q*q**

Q*

The AC curve assuming

timber costs p1

Demand Change due to Factor Price Change

Effect of Price Changes

p*

q*q**

p**

Q*Q**

The AC curve assuming

timber costs p1The AC curve assuming

timber costs p2

Demand Change due to Factor Price Change

Effect of Price Changes

p*

q*q**

p**

Q*Q**

Q* Q**

S

Demand Change due to Factor Price Change

Effect of Price Changes

p*

q*q**

p**

Q*Q**

Q* Q**

SBecause of external

pecuniary diseconomies, we

get an upward sloping supply

curve for lumber

Demand Change due to Factor Price Change

Effect of Price Changes

p*

q*q**

p**

Q*Q**

Q* Q**

SBecause of external

pecuniary diseconomies, we

get an upward sloping supply

curve for lumber

If you want a supply Q** of

lumber the price will be p**

Demand Change due to Factor Price Change

Long Run and Short Run Changes

D

p1

q1

The demand

and supply curves

SLR

Demand Change due to Factor Price Change

First Movement

DD’

SLRSSR

p2

p1

q1 q2

Initial effect of demand shift is

movement along SR Supply Curve

Demand Change due to Factor Price Change

New Firms Enter, Pushing SR Supply Curve to Right

DD’

SLRS’SRSSR

p3

p2

p1

q1 q2 q3

Demand Change due to Factor Price Change

Last Movement

DD’

SLRS’SRSSR

p3

p2

p1

q1 q2 q3

Then, a movement down new demand curve.

Demand Change due to Factor Price Change

Net Effect

DD’

SLRS’SRSSR

p3

p2

p1

q1 q2 q3

Movement along LR

supply curve.

Demand Change due to Factor Price Change

Net Effect

DD’

SLRS’SRSSR

p3

p2

p1

q1 q2 q3

Movement along LR

supply curve.

Price goes up, even though industry is perfectly

competitive and all firms

are alike.

Demand Change due to Factor Price Change

End

©2006 Charles W. Upton