The demand curve for an input will slope downward because of
A) the factor substitution effect.
B) the output effect.
C) decreasing returns to scale.
D) both A and B

Question

Quizplus · Accepted Answer

The downward slope of the demand curve for an input can be explained by both the factor substitution effect and the output effect. The factor substitution effect states that as the price of an input increases, firms will switch to using a substitute input that is relatively cheaper. This leads to a decrease in the quantity demanded of the original input. The output effect states that as the price of an input increases, the cost of producing an additional unit of output increases. In order to maintain profits, producers respond by decreasing the quantity demanded of the input. Thus, both the factor substitution effect and the output effect lead to a downward sloping demand curve for an input.

The Demand Curve for an Input Will Slope Downward Because