Inverse demand function, Microeconomics

Assignment Help:

Inverse Demand Function: If variable factor prices changes, then the isocost line will tilt and consequently, the optimal factor requirement will be different. Suppose the wage rate of labor is allowed to vary. The resulting locus of profit maximizing amount of labor is referred to as the inverse demand function for labor. It measures what the price of labor must be to get certain units of labor, when the level of the other factor is fixed.

2183_Inverse Demand Function.png


• Expansion Path: This line shows how the factor combinations utilized by a firm changes as it expands its level of output. It is the locus of points of tangency between the isoquants and isocost lines.

• Price Factor Curve (PFC): Holding total cost fixed, factor prices are allowed to vary. If e change the price of L and hold the price of K fixed then the isocost will tilt. The locus of optimal factor combination points is known as the price factor cost. Note that this is the long run equivalent of the inverse demand function.

663_Inverse Demand Function1.png

• Effect of Change in the Factor Price: The total effect of a change in the price of a factor can be divided in 2 - the expansion or output effect and the technical substitution effect. The output effect refers to the changes caused due to the alterations in the total cost. Technical substitution effect is the result of the change in the relative price of the factors. This is similar to the effect of changes in the price of a commodity that we mentioned under Slutsky equation.

• Expenditure Elasticity :This measures the percentage change in the factor used in response to the change in the total cost. If this value is greater than 0 then the factor is superior, otherwise it is inferior.


Related Discussions:- Inverse demand function

Growth and patterns multipliers theory, (a) Reasons of Urban Growth (b) Cha...

(a) Reasons of Urban Growth (b) Characteristics of Urban Growth (c) Economic Life of a Building (d) Zone of Transition (e) Location Theory (f) Patterns of Growth Theory (g) Growth

Is the natural rate of unemployment includes frictional, Is the natural rat...

Is the natural rate of unemployment includes frictional, structural & seasonal unemployment?  The natural rate of unemployment contains frictional, structural & seasonal unempl

Determinants of investments, Determinants of investments: Expected Ra...

Determinants of investments: Expected Rate of Return: Investment spending is guided by the profit motive; thebusiness sector buys capital goods only when it expects such

Linder theory, According to the Linder theory ,trade will occur in goods th...

According to the Linder theory ,trade will occur in goods that have overlapping demand. With aid of a graph ,illustrate this theory and its implications

Theory of demand and utility, prove that the utility approach and the indif...

prove that the utility approach and the indifference curve yield the same consumer equilibrium.

Micro economics, If the Bank of England wanted to discourage investment spe...

If the Bank of England wanted to discourage investment spending and reduce aggregate demand, it could? A. reduce the required reserve ratio B. sells securities on the open m

Cost theory, if marginal cost descreases then what else is effected by this...

if marginal cost descreases then what else is effected by this

Income elasticity of demand, Income Elasticity of Demand is described below...

Income Elasticity of Demand is described below: Income elasticity of demand is the percentage change in the quantity demanded/required with respect to the percentage change in

Differentiate between a firm and a market, 1 Differentiate between a firm a...

1 Differentiate between a firm and a market. 2 Graphically illustrate (i.e. draw) and explain the relationship between the market demand curve and the individual firm's demand c

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd