c


 


  ! !
 "# $%

 The original demand and supply curves are „ and


 | uilibrium is at | ^ith price  and uantity employed 0.
 The factor¶s income is sho^n by the dark blue area in the figure.
 When the demand curve shifts to „G e uilibrium shifts to |
 Êrice rises to  and uantity to .
 The factor¶s income rises by the amount of the medium blue
area.
 &'( )* +"",%(
!#!! !

 The larger is the proportion of total costs accounted for by a factorG

the more elastic is the demand for it.
 The demand curve for the industry¶s product is D
 At the factor¶s original priceG the industry¶s supply curve (based on
its marginal costs) is
.
 The factor¶s price no^ falls.
 If the factor accounts for a large part of costsG the industry supply
curve shift by a lot to
G and output rises to .
 If factor accounts for only a small part of costsG the industry supply
curve shifts by a smaller amount to
G and output rises only to .
 The larger increase in output at  leads to a larger increase in the
uantity demanded of the factor compared ^ith the smaller increase
in output to .
 &'( )* +"",%(
!#!! !

 The more elastic is the demand for the product made by a factorG
the more elastic is the demand for it.
 The original demand and supply curves for the industry¶s product
intersect at | to produce an industry output of  .
 The factor¶s price no^ falls shifting the industry supply curve to

.
 With the relatively elastic demandG „ G the industry¶s output rises
to .
 With a relatively inelastic demandG „
G the industry¶s output rises
only to .
 The increase in the uantity demanded for the factor ^ill be
greater ^hen industry output expands to  than ^hen it only
expands to .
  +! (
("- %

 A single demand curve is sho^n ^ith three different supply curves.

 In each case the competitive e uilibrium price is £600G and 4G000 units
of the factor are hired.
 The total payment (£2.4 million) is represented by the entire dark and
medium blue areas.
 When the supply curve is verticalG
G the ^hole payment is economic
rentG because a decrease in price ^ould not lead any units of the factor
to move else^here.
 When the supply curve is horizontalG
none of the payment is rentG
because even a small decrease in price offered ^ould lead all units of
the factor to move else^here.
 +! (
("- %&.!'

 When the supply curve is positively slopedG
part of the

payment is rent.
 Although the 4G000th unit is receiving just enough to
persuade it to offer its services in this marketG the 2G000th
unit is earning ^ell above ^hat it re uires to stay in this
market.
 The aggregate of economic rents is sho^n by the dark blue
areaG and the aggregate of ^hat must be paid to keep 4G000
units in this market is sho^n by the light blue area.