In the last chapter, we discussed the short-run and the long-run behavior of firms given their costs. In this chapter, we will begin developing a more complete and comprehensive understanding of how firms choose the inputs for production (and hence, production technologies) in a profit-maximizing manner. We will show how the demand for inputs is ultimately derived from the value of the input in the production process and examine what causes input demand to change. This chapter focuses on the labor and land markets; the capital market will be discussed in chapter 10. By the end of this chapter, you should be able to answer the following questions:
1. How is the demand for an input dependent upon the demand for an output?
2. Given a wage, how does a firm decide how many people to hire?
3. What is the difference between the factor substitution effect and the output effect of a factor price change?
4. What makes the land market different from many other markets?
5. What will cause firms to demand more or demand less of a single input when the price of the input does not change?
6. What is the profit-maximizing rule for the firms demand of inputs?