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

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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.

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  • Richard Watt, 2020. "An Overlooked Result on the Competitive Firm under Output Price Risk: Are Factor Demand Curves Downward Sloping?," Working Papers in Economics 20/11, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:20/11
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    File URL: https://repec.canterbury.ac.nz/cbt/econwp/2011.pdf
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    References listed on IDEAS

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    1. Batra, Raveendra N & Ullah, Aman, 1974. "Competitive Firm and the Theory of Input Demand under Price Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 537-548, May/June.
    2. Hartman, Richard, 1976. "Factor Demand with Output Price Uncertainty," American Economic Review, American Economic Association, vol. 66(4), pages 675-681, September.
    3. Baron, David P, 1970. "Price Uncertainty, Utility, and Industry Equilibrium in Pure Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 463-480, October.
    4. Hartman, Richard, 1975. "Competitive Firm and the Theory of Input Demand under Price Uncertainty: Comment," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1289-1290, December.
    5. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    6. Katz, Eliakim, 1983. "Relative Risk Aversion in Comparative Statics," American Economic Review, American Economic Association, vol. 73(3), pages 452-453, June.
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    Cited by:

    1. Bonilla, Claudio A. & Fica, Diego, 2022. "Loss aversion and risky entrepreneurship," Finance Research Letters, Elsevier, vol. 48(C).

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    More about this item

    Keywords

    Price risk; competitive firms; labor demand;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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