Inverse Factor Demand Curves

The factor demand curves of a firm measure the relationship between the price of a factor and the profit-maximizing choice of that factor. We saw above how to find the profit-maximizing choices: for any prices, (p, w\, w2), we just find those factor demands, (x*,^), such that the value of the marginal product of each factor equals its price.

The inverse factor demand curve measures the same relationship, but from a different point of view. It measures what the factor prices must be for some given quantity of inputs to be demanded. Given the optimal choice of factor 2, we can draw the relationship between the optimal choice of factor 1 and its price in a diagram like that depicted in Figure 19.3. This is simply a graph of the equation pMPi{xx,x2) = wx.

This curve will be downward sloping by the assumption of diminishing marginal product. For any level of x\, this curve depicts what the factor price must be in order to induce the firm to demand that level of X\, holding factor 2 fixed at x2.

The inverse factor demand curve* This measures what the price of factor 1 must be to get x\ units demanded if the level of the other factor is held fixed at x\.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook

Post a comment