In order to get the demand curve for a firm for one of...

In order to get the demand curve for a firm for one of several variable inputs, we must consider (a) the internal effect of the change in the input price, (b) the external effect of the change in the input price, (c) monopolistic exploitation, or $(d)$ monopolistic exploitation.

Key Concepts

Input Demand Curve

The input demand curve represents the relationship between the price of a factor and the quantity of that factor that a firm chooses to employ, holding other factors constant. It is derived from the firm’s cost minimization problem, where the goal is to achieve a given level of output at minimum cost by optimally adjusting the use of various inputs based on their marginal productivity and relative prices.

Internal Effect

The internal effect refers to the impact of a change in the price of one input on the firm’s internal allocation of resources. This effect captures how the firm substitutes between inputs in response to changes in relative prices while maintaining the same level of output. It is analyzed through the firm’s production function and first-order conditions for cost minimization, reflecting the adjustment of input usage solely based on technical relationships within the firm.

External Effect

The external effect considers the broader impact of a change in the price of one input on the overall production process, particularly how it influences the marginal productivity of other inputs. This effect recognizes that a change in one input's price may alter the optimal mix of inputs not only via substitution but also due to interdependencies in the production process, thereby affecting the demand for other inputs indirectly.

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