Thus far we've determined where the demand curve for a factor comes from and what causes it to shift. All that remains is to examine those factors which affect the elasticity of factor demand curves. This is important because as we shall see in the section on Factor Prices, how elastic or inelastic the demeand curve for a factor is determines the relative strength of the effect of a supply shift on factor price and quantity hired. As always we will illustrate more inelastic curves by drawing them with a steeper slope.
The larger the percentage of total production cost due to a particular factor, the more elastic that factor's demand will be. Suppose some factor accounts for 75% of total production costs. If its price increases by 10%, total cost will increase by 7.5%, almost certainly leading to an increase in product price and a resulting decrease in product demand. If some other factor accounts for only 5% of total cost and its price increases by 10%, total cost only rises by .05%. It may be possible for the firm to entirely absorb such a modest cost increase without having to increase market prices significantly.
We will see that the elasticity of factor demand curve is also affected by the Marginal Productivity of the factor and by the elasticity of the product demand curve.
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