Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 13] INPUT PRICING AND EMPLOYMENT 285
Thus, if the firm’s MRP a curve shifts to MRP 0 a as P a falls from $8 to $4 (see Fig. 13-1), the firm will increase
the quantity it uses of input A from three units (point A on the MRP a curve) to eight units (point C on the MRP 0 a
curve). Point A and point C are then two points on this firm’s demand curve for input A. Other points could be
obtained in a similar way. Joining these points, we get this firm’s demand curve for input A (d a in Fig. 13-1).
13.4 THE MARKET DEMAND CURVE FOR AN INPUT
We cannot get the market demand curve for input A by simply summing horizontally the individual firms’
demand curves for input A. A so-called external effect on the firm resulting from the reduction in the price of
input A must also be considered. That is, d a in Fig. 13-1 was drawn on the assumption that the price at which the
firm sells commodity X remains constant. However, when P a falls, all firms producing commodity X will
increase their quantity of input A demanded, and produce more of commodity X. This will increase the
market supply of commodity X, and given the market demand for X, will result in a fall in P x . This fall in
P x will cause a leftward shift in the firm’s MRP a curves and thus in d a . It is the quantity of input A demanded
by each firm on this lower d a that is summed to get the market quantity demanded of input A when P a falls.
EXAMPLE 3. In Fig. 13-2, d a is the same as in Fig. 13-1. When P a ¼ $8, the firm demands three units of input A (point A
on d a ). If there are 100 identical firms demanding input A, we get point A 0 on D a . When P a falls to $4, each firm using input A
will expand its use of input A. Thus, QS x increases and P x falls. This shifts d a to the left, say to da 0 , and the firm demands six
units of input A at P a ¼ $4 (point E on da 0 ). With 100 identical firms in the market, we get point E 0 on D a . Other points can be
similarly obtained. By joining these points, we get D a .
Fig. 13-2
13.5 THE MARKET SUPPLY CURVE FOR AN INPUT
The market supply curve of an input is obtained by the straightforward horizontal summation of the supply
curve of the individual suppliers of the input. Thus, the supply curve of the input to an individual firm is infinitely
elastic. The market supply curve of an input is usually positively sloped, however, indicating that greater
quantities of the input will be placed on the market only at higher input prices. (For a discussion of a “backwardbending”
supply curve of labor, see Problem 13.9.)
13.6 PRICING AND LEVEL OF EMPLOYMENT OF AN INPUT
Just as in the case of a final commodity, the equilibrium price of an input and the quantity of it employed
are determined at the intersection of the market demand curve and the market supply curve for the input.
EXAMPLE 4. In Fig. 13-3, S a is a hypothetical market supply curve for input A, while D a is the market demand curve for
input A of Fig. 13-2; D a and S a intersect at point E 0 and determine the equilibrium market price of $4 for input A and the
equilibrium market quantity of 600 units of input A. At P a . $4, QS a . QD a and P a falls. At P a , $4, QD a . QS a and P a