The elasticity of demand for an input measures the degree of the response of the quantity demanded to a change in its price.
Following factors influence the elasticity of demand for inputs:
(a) Rate of Productivity Fall:
If marginal productivity decreases rapidly as more of a variable input is employed, there will be small increase in the demand of input with its price fall resulting in low elasticity of the firm’s demand curve for the input and vice-versa.
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(b) Substitution:
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In the long run, all inputs are variable. If price of one input changes, firms try to substitute the cheaper for the costlier inputs. Therefore, the ease with which one input can be substituted for the other will influence the slope of the demand curve and hence the elasticity of demand for the input.
The greater the ease of substitution, the greater is the elasticity of demand for the input. The ease of substitution, in turn, depends on the time period, availability of the substitutes and the production technology. The degree of substitutions is more in general jobs than specialised ones.
(c) Proportion of Total Cost:
Other things being equal, the larger the proportion of factor cost to the total cost of producing some product, the greater is the elasticity of demand for that input. In Fig. 17.5 (a), D and S0 are the original demand and supply curves for the industry intersecting each other at equilibrium point e0. Now, suppose, the input price falls.
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If it accounts for a small part of the industry’s total cost, each firm’s MC and industry supply curve shifts downward by only a small amount to S, and output expands only by a small amount q0q, implying in turn only a small increase in the quantity of the variable input demanded. If, on the other hand, the input accounts for a large part of the industry’s TC, each firm’s MC curve shifts downward a great deal and so does the industry’s supply curve to S2. Output increases in a larger quantity to q2 as does the underlying demand for the variable input.
(d) Elasticity of Demand of Output:
Other things being equal, the more elastic the demand for the product that the input helps to make, the more elastic is the demand for the input and vice-versa, since the demand for the input is derived from the product it helps to produce. In Fig. 17.5 (b) S0 is the original industry supply curve, which intersects both the elastic and inelastic demand curve at .
A fall in the price of an input causes the industry’s supply curve to shift downward to S1. When the demand curve is relatively inelastic (D.), the industries output increases by only a small amount to.
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The quantity of the variable input will increase by only a correspondingly small amount. But, if the demand curve is elastic (De), industry’s output increases by a larger amount to q2 and the quantity of the variable input will increase by a correspondingly larger amount.