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ABILITY-TO-PAY PRINCIPLE: A principle of taxation in which taxes are based on the income or resource-ownership ability of people to pay the tax. The income tax collected by our friends at the Internal Revenue Service is one of the most common taxes that seeks to abide by the ability-to-pay principle. In theory, the income tax system is set up such that people with greater incomes pay more taxes. Proportional and progressive taxes follow this ability-to-pay principle, while regressive taxes, such as sales taxes and Social Security taxes, don't.
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                           FACTOR DEMAND ELASTICITY: The elasticity of a factor demand curve is affected by four items: (1) the price elasticity of demand for the good produced, (2) the production function technology and elasticity of marginal physical product, (3) the ease of factor substitutability, and (4) the share of the factor's cost relative to total cost. Changes in any of these four items cause the price elasticity of factor demand to change. In other words, the quantity of factor services demanded becomes more or less sensitive to changes in the factor price. Factor demand elasticity is the relative response of the quantity demanded of a factor to the changes in the price of the factor. Comparable to other elasticities, factor demand elasticity is specified by percentage changes, as indicated by this equation:price elasticity
of factor demand | = | percentage change
in quantity demanded of factor
percentage change
in factor price |
The elasticity of the factor demand curve is affected by four influences: (1) the price elasticity of demand for the good produced, (2) the production function technology and elasticity of marginal physical product, (3) the ease of factor substitutability, and (4) the share of the factor's cost relative to total cost. Consider how each of these four affect the factor demand elasticity for labor employed in the production of Wacky Willy Stuffed Amigos (those cute and cuddly, soft and huggable, stuffed tarantulas, armadillos, and turtles). Product Price ElasticityIf the demand for Stuffed Amigos is relatively elastic, then the factor demand for the labor used to produce Stuffed Amigos also tends to be relatively elastic. Suppose, for example, that the wage paid to Wacky Willy workers increases. This causes an increase in production cost, which in all likelihood is reflected in an increase in the price of Stuffed Amigos. If buyers are relatively sensitive to price increases and have a relatively big reduction in the quantity demanded, then The Wacky Willy Company produces fewer Stuffed Amigos and thus needs less labor.Alternatively, if the demand for Stuffed Amigos is relatively inelastic, then the factor demand for labor used to produce Stuffed Amigos also tends to be relatively inelastic. While a higher wage paid to Wacky Willy workers is passed along as higher prices, Stuffed Amigo buyers do not change their quantity demanded very much. As such, The Wacky Willy Company continues to produce about the same quantity of Stuffed Amigos and thus need about the same quantity of labor. Production TechnologyThe production techniques used to produce Stuffed Amigos, particularly in terms of the marginal physical product of labor, also affects the factor demand price elasticity. Suppose, for example, that the marginal physical product of Wacky Willy workers is relatively unaffected by additional workers. In other words, the marginal physical product of the tenth worker might be something like 20, but the marginal physical product of the hundredth worker is 19. Because marginal produce declines very little with a lot of extra labor, the factor demand curve is relatively elastic. Relatively small changes in the factor price entice The Wacky Willy Company to undertake relatively large changes in employment.Alternatively, if marginal physical product declines sharply with additional workers, then the factor demand curve is less elastic, or more inelastic. If the marginal physical product of the tenth worker is 20 and the marginal physical product of the eleventh worker is 1, then relatively large changes in factor prices are needed to entice The Wacky Willy Company to change employment. Factor SubstitutabilityTo the extent that other factors can be substituted easily for the workers used to produce Stuffed Amigos, the factor demand for Wacky Willy workers is more elastic. Suppose, for example, that The Wacky Willy Company can easily produce Stuffed Amigos "by hand" using a lot of workers and very little capital equipment or it can produce them using more sewing machines, pattern-cutting machines, and other equipment, but fewer workers.The easier it is for The Wacky Willy Company to switch between these two production methods, then the more elastic is the factor demand for labor. A higher factor price for labor entices The Wacky Willy Company to use more capital and less labor. If the wage rate goes up by 10 percent, then they lay-off a bunch of workers and buy a bunch of sewing machines. The more difficult it is for The Wacky Willy Company to switch between these two production methods, then the less elastic, or more inelastic, is factor demand for labor. A higher factor price for labor does NOT entice The Wacky Willy Company to use more capital and less labor. If workers do tasks that just cannot be accomplished by machines, then a 10 percent wage rate increase is unlikely to entice The Wacky Willy Company to replace workers with capital. Factor Cost ShareFactors that constitute a relatively larger share of a firm's total production cost tend to have a relatively greater factor demand elasticity. Suppose, for example, that Wacky Willy worker wages are ninety percent of the cost of producing Stuffed Amigos. In this case, a ten percent change in factor prices, or worker wages, has a relatively big affect on production cost, the price of Stuffed Amigos, and the quantity demanded. As such, Stuffed Amigo buyers buy less and The Wacky Willy Company needs fewer workers.Alternatively, factors that constitute a relatively smaller share of a firm's total production cost tend to have a relatively smaller factor demand elasticity. Suppose, for example, that Wacky Willy worker wages are only ten percent of the cost of producing Stuffed Amigos. In this case, a ten percent change in worker wages has a relatively small affect on production cost, the price of Stuffed Amigos, and the quantity demanded. As such, Stuffed Amigo demand, production, and worker employment is unlikely to change very much.
Recommended Citation:FACTOR DEMAND ELASTICITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: January 25, 2025].
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Today, you are likely to spend a great deal of time wandering around the shopping mall looking to buy either a wall poster commemorating yesterday or pink cotton balls. Be on the lookout for neighborhood pets, especially belligerent parrots.
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Junk bonds are so called because they have a better than 50% chance of default, carrying a Standard & Poor's rating of CC or lower.
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"The creative is the place where no one else has ever been. the You have to leave the city of your comfort and go into wilderness of your intuition. What you'll discover will be wonderful. What you'll discover will be yourself." -- Alan Alda, Actor
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MCP
Marginal Cost Pricing
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