Whether a society adapts to a supply shock or resists it coercively depends on the costs of each action. The more costly is adaptation, the likelier is a coercive response. We consider three kinds of adaptation, each usually costlier than the last: factor substitution, factor mobility, and factor-saving technology. Where substitution is elastic, producers can readily substitute a cheaper factor for one that has become suddenly expensive. Inelastic substitution forecloses that alternative, but often a suddenly devalued factor can exit to a different sector or region where it remains in higher demand. Where neither substitution nor exit is possible, a factor-saving technology or institutions that use a factor more efficiently – e.g., where labor is suddenly scarce, a labor-saving technology – can sometimes be adopted or invented. The puzzle, addressed in the next chapter, is why a new technology does, or does not, arise.

In this chapter, we examine the supply side of an economy as represented in computable general equilibrium (CGE) models. The production data in the social accounting matrix (SAM) depict the production process, in which firms combine intermediate inputs with factors of production to produce goods and services. We use these data to calculate input-output coefficients, which describe the input intensity of production processes. CGE models break down the production technology into parts, depicting how subprocesses are nested within the overall production process. Within each nest, behavioral equations describe producers’ efficiency-maximizing input demands and output levels, subject to their production technology. Export transformation functions, used in some CGE models, describe the allocation of production between domestic and export markets.We also examine the supply and demand structure of a CGE model with a non-diagonal make matrix and a technical appendix examines a case of energy nesting.

In this chapter, we explore factor markets in a computable general equilibrium (CGE) model. Data in the Social Accounting Matrix (SAM) on factors of production describe factors’ sources of employment and income. Important factor market concepts in the CGE model are factor mobility assumptions, the effects of factor endowment and productivity growth, complementary and substitute factors, full-employment versus unemployment model closures, and the links between changes in factor supply and industry structure and between changes in industry structure and factor prices.