An Overlooked Result on the Competitive Firm under Output Price Risk: Are Factor Demand Curves Downward Sloping?

Richard Watt ()
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Richard Watt: University of Canterbury, https://www.canterbury.ac.nz

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: The result that there are no Giffen input factors for a perfectly competitive firm under full certainty is one of the kingpins of basic undergraduate microeconomics. When the firm knows perfectly the price at which output can be sold, then the demand for each factor is a decreasing function of the unit wage of that factor. However, does that basic result on the slope of input demand functions still hold under more general conditions? Specifically, if the price at which the output is to be sold is stochastic, is it still true that the demand of a given firm for its inputs is unconditionally decreasing in the wage that is paid to obtain that input? In the present paper, using the simplest possible model, I show that under price risk the demand for labor by a competitive firm cannot be guaranteed to be downward sloping in the wage, and I provide sufficient conditions for labor demand to be ordinary. I also show how the analysis of this point that is found in the original literature is incorrect.

Keywords: Price risk; competitive firms; labor demand (search for similar items in EconPapers)
JEL-codes: D2 D8 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2020-07-01
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

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