Answer to Question #228906 in Microeconomics for KAT

Question

 What effect will a reduction in commodity price have on the input demand curve of the firm give in detail ?

Answer 1

The demand curve shows the negative relationship between price of the final good and its quantity demanded. This means as the price of the good increases then the quantity demanded decreases and vice-versa. 

Moreover, the input demand curve is also negatively sloped but it is derived demand. It is because the demand of input is derived by the demand of the final good.

As the price of final good reduces then the profit of the firm reduces which demoralize the producer. As a result, the producer reduces the production. Subsequently, the demand of input reduces. Thus, the input demand curve shifts leftward. It can be indicated as follows:

As a result, the equilibrium quantity and price of input reduces.