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Substitution and size effect for factor demand revisited

Author

Listed:
  • Johannes Bröcker

    (Kiel University)

  • Till Requate

    (Kiel University)

Abstract

We reconsider the decomposition of the comparative statics effect of a factor price increase on (unconditional) factor demand into a substitution and a size (or level) effect. While for the own price effect the substitution effect and the size effect go into the same negative direction, the cross price effect cannot be signed unambiguously, in general. But for two cases of regularity, homotheticity and complementarity, the size effect is negative. We furthermore show by example that in both special cases the cross substitution effects are still ambiguous, but that under complementarity the unconditional effect is always negative. Hence, if the cross substitution effect happens to be positive, it is dominated by the negative size effect in this case. We further show by example that without such regularity assumptions the cross price effect is ambiguous. Finally, we study the impact of a factor price increase on the cost, which can also increase or decrease.

Suggested Citation

  • Johannes Bröcker & Till Requate, 2022. "Substitution and size effect for factor demand revisited," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(2), pages 251-265, October.
    • Handle: RePEc:spr:etbull:v:10:y:2022:i:2:d:10.1007_s40505-022-00229-z
    DOI: 10.1007/s40505-022-00229-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Slutsky equation; (Conditional)Factor demand; Comparative statics; Substitution effect; Size effect; Level effect;
    All these keywords.

    JEL classification:

    • B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical
    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition

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