Factor Demand Theory Under Perfect Competition, Monopoly, and Monopsony
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Recognizing the failure of textbooks to treat factor demand adequately, Shishko attempts to clear up a point of confusion in the theory of derived demand. The problem arises in the neoclassical theory of the firm under perfect competition because the price of output is assumed to remain fixed even though an increase in the price of any factor will also shift the entire average cost schedule. In the long run, says Shishko, the price of output, under perfect competition, clearly must change as well to maintain the zero-profit condition; i.e., price equals long-run minimum average cost. The discussion is in three parts: (1) Factor demand conditions under monopoly are examined. (2) Perfect competition is examined, first using the traditional model and then using the general model. (3) Monopsony in some factor markets is considered.
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