Demand for Capital Service (Consumption Good in the Production of Household Goods)

Abstract

Capital service is demanded by a variety of producing units, for example, capitalist firms which employ this service to maximize the residual profit imputable to themselves, and family firms of the producer-consumer households which employ this service to maximize the welfare of their family members. However, if the market they face for labor is perfectly competitive, their family firms are organized to maximize the residual profit imputable to themselves, which is consistent with the maximum welfare of their family members since all of their residual profit is transferred to their owner households as seen in section 2.3 of the second chapter. Therefore, the demand function of family firms of these households for capital service proves to be formally identical to the one for the corresponding capitalist firms. However, if the market for labor fails to be perfectly competitive with external employment for their family labor being limited, their demand function for this service turns out not to be formally identical but to be less elastic than the one for the corresponding capitalist firms.