- Firms demand inputs based on the demand for the outputs they can produce. Inputs are complementary or substitutable, and subject to diminishing returns. - A firm will demand an input as long as its marginal revenue product exceeds its cost. For a single variable input like labor, the marginal revenue product curve determines the firm's demand in the short run. - When a factor price changes, firms substitute toward cheaper inputs but also adjust output, affecting demand for all inputs. Higher wages induce substitution from labor to capital through technology changes.