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

2. Demand Change due to Factor Price Change An Endogenous Change p min S LR S SR D Now let’s talk about how a change in demand can affect factor prices.

3. Demand Change due to Factor Price Change An Endogenous Change p min S LR S SR D

4. Demand Change due to Factor Price Change An Endogenous Change p min S LR S SR D

5. Demand Change due to Factor Price Change An Endogenous Change p min S LR S SR D p1p1

6. Demand Change due to Factor Price Change An Endogenous Change p min S LR S SR D p1p1

7. Demand Change due to Factor Price Change An Endogenous Change p min S LR S SR D p1p1 No change in factor prices means no long run change in product price.

8. Demand Change due to Factor Price Change An Endogenous Change p min S LR S SR D p1p1 No change in factor prices means no long run change in product price. But it does not have to be this way.

9. Demand Change due to Factor Price Change The demand for lumber Lumber is a highly competitive business, with a key factor of production: timber.

10. 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

11. 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.

12. 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.

13. Demand Change due to Factor Price Change The Demand for Lumber and Timber Lumber D

14. Demand Change due to Factor Price Change Ignoring Timber Prices Lumber D S

15. Demand Change due to Factor Price Change An Increase in Demand Lumber D S D`

16. Demand Change due to Factor Price Change Complication of SR supply curve Lumber D S D`

17. Demand Change due to Factor Price Change Complication of SR supply curve Lumber D S D`

18. Demand Change due to Factor Price Change Complication of SR supply curve Lumber D S D`

19. 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.

20. Demand Change due to Factor Price Change The Demand for Lumber and Timber Lumber Timber D D S

21. Demand Change due to Factor Price Change The Demand for Lumber and Timber Lumber Timber D D’ D S

22. Demand Change due to Factor Price Change The Demand for Lumber and Timber Lumber Timber D D’ D S If lumber production is increasing due to a demand shift, there is a shift in the demand for timber. Timber prices will be going up.

23. Demand Change due to Factor Price Change Effect of Price Changes p* q*q** Q* The AC curve assuming timber costs p 1

24. Demand Change due to Factor Price Change Effect of Price Changes p* q*q** p** Q* Q** The AC curve assuming timber costs p 1 The AC curve assuming timber costs p 2

25. Demand Change due to Factor Price Change Effect of Price Changes p* q*q** p** Q* Q** Q*Q** S

26. Demand Change due to Factor Price Change Effect of Price Changes p* q*q** p** Q* Q** Q*Q** S Because of external pecuniary diseconomies, we get an upward sloping supply curve for lumber

27. Demand Change due to Factor Price Change Effect of Price Changes p* q*q** p** Q* Q** Q*Q** S Because 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**

28. Demand Change due to Factor Price Change Long Run and Short Run Changes D p1p1 q1q1 The demand and supply curves S LR

29. Demand Change due to Factor Price Change First Movement D D’ S LR S SR p2p2 p1p1 q1q1 q2q2 Initial effect of demand shift is movement along SR Supply Curve

30. Demand Change due to Factor Price Change New Firms Enter, Pushing SR Supply Curve to Right D D’ S LR S’ SR S SR p3p3 p2p2 p1p1 q1q1 q2q2 q3q3

31. Demand Change due to Factor Price Change Last Movement D D’ S LR S’ SR S SR p3p3 p2p2 p1p1 q1q1 q2q2 q3q3 Then, a movement down new demand curve.

32. Demand Change due to Factor Price Change Net Effect D D’ S LR S’ SR S SR p3p3 p2p2 p1p1 q1q1 q2q2 q3q3 Movement along LR supply curve.

33. Demand Change due to Factor Price Change Net Effect D D’ S LR S’ SR S SR p3p3 p2p2 p1p1 q1q1 q2q2 q3q3 Movement along LR supply curve. Price goes up, even though industry is perfectly competitive and all firms are alike.

34. Demand Change due to Factor Price Change End ©2006 Charles W. Upton