Quiz 12/8 Flashcards
1
Q
Explain the substitution effect, output effect, and net effect of labor
A
Substitution effect: machinery is substituted for labor- the demand for labor decreases
Output effect: because the price of machinery has fallen, production costs decline and output increases. The demand for all resources, including labor, increases
Net effect: the substitution and output effects work in opposite directions. Whichever force is stronger will win out. (Ex: a boat adrift (wind vs. tide))
