15.21 : Linkages Among the Factors of Production

Factors of production are closely interconnected. The change in the availability of one factor of production can influence the optimal quantity of another factor of production.

Consider a large farm employing several workers and renting many tractors. A significant natural calamity, such as a widespread health crisis, can impact labor supply. Such a crisis can tragically result in the loss of human life, thereby reducing the number of available workers.

A reduction in the supply of labor results in changes in the labor market. This causes a shift of the labor supply curve to the left. This means there are fewer workers willing or able to work at each wage level than before. This creates a shortage of workers at the old equilibrium wage. So, employers respond to this shortage by offering higher wages to attract the reduced number of available workers. However, an increase in the equilibrium wage leads to higher production costs for employers. In response to these higher production costs, employers reduce their output and hire a lower number of workers than before.

This change in the labor market affects the market for capital. For example, the farmer rents capital. As fewer workers are hired at the new equilibrium, there will be fewer workers available to operate the tractors, leaving many of the rented tractors unused. This causes a reduction in the farmers' demand for tractors, shifting the demand curve for tractors to the left. As fewer tractors are being rented, the suppliers for tractors face excess inventory. This surplus of tractors puts downward pressure on equilibrium tractor rental prices.

This example demonstrates how a shift in the supply curve for labor not only affects wages and employment in the labor market, but also affects the equilibrium rental price and quantity of capital equipment in the market for physical capital.