Explain why input demand curves slope downward using the concepts of the factor substitution effect and the output effect
What will be an ideal response?
When the price of an input increases, the firm will substitute away from it toward other types of inputs. This is the factor substitution effect. Since the input is more expensive, the firm's costs will rise. Therefore, the firm will lower its level of production in the short run. This means that the firm will need to employ fewer units of all of the inputs it uses. This is the output effect. Both of these effects suggest that if the price of an input rises, the quantity of that input demanded will fall. This inverse relationship between the price of an input and its quantity demanded is represented by a downward sloping curve.
You might also like to view...
On a production possibilities frontier diagram, where are production points that have tradeoffs? Where are production points with a free lunch?
What will be an ideal response?
When the dollar appreciates, U.S. net exports fall and aggregate demand decreases
Indicate whether the statement is true or false