A firm will employ more of an input whose relative price has fallen and,conversely,will use less of an input whose relative price has risen.Thus,a fall in the price of capital will increase the relative price of labor and thereby reduce the demand for labor.This describes the:

A) output effect.
B) substitution effect.
C) idea of derived demand.
D) law of diminishing returns.

The statement describes the substitution effect, which is the change in the quantity demanded of one input in response to a change in the price of another input. The idea of derived demand refers to the demand for a factor of production that is derived from the demand for the output it helps to produce. The law of diminishing returns refers to the decrease in marginal output as more units of an input are added while holding other inputs constant. The output effect is the change in the quantity of output produced as a result of a change in the price of an input.