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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
