Lecture Economics (18th edition): Chapter 12 - McConnell, Brue, Flynn''s

Chapter 12
The Demand
For Resources

McGraw­Hill/Irwin

        Copyright © 2009 by The McGraw­Hill Companies, Inc. All rights reserved.


Chapter Objectives
• Resource pricing
• Marginal revenue productivity
and firm resource demand
• Factors that affect resource
demand
• Elasticity of resource demand
• Optimal combination of
resources for the competitive
firm
12-2


Resource Pricing
• Firms demand resources
– Focus on labor

• Resource prices are important
– Money-income determination
– Cost minimization
– Resource allocation
– Policy issues

12-3


Resource Demand
• All markets are competitive
(good and resource)
• Derived demand depends on:
– Productivity of resource (MP)
– Price of good it helps produce (P)

• Marginal revenue product (MRP)
– Change in TR resulting from unit
change in resource (labor)
12-4


Resource Demand
Rule for employing resources:
• MRP = MRC
• Marginal Revenue Product (MRP)
Marginal
Revenue
Product

=

Change in Total Revenue
Unit Change in Resource Quantity

• Marginal Resource Cost (MRC)

Marginal
Resource
Cost

=

Change in Total (Resource) Cost
Unit Change in Resource Quantity
12-5


MRP as Resource Demand
(1)
(2)
(3)
(4)
(5)
(6)
Units of Total Product
Marginal
Product Total Revenue, Marginal Revenue
Resource
(Output)
Product (MP) Price
(2) X (4)
Product (MRP)

0
1
2

3
4
5
6
7

0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28

$2
2
2
2
2
2
2
2

7
6
5
4
3

2
1

$0
14
26
36
44
50
54
56

]
]
]
]
]
]
]

$14
12
10
8
6
4
2

$18

Resource Wage
(Wage Rate)

Purely
Competitive
Firm’s
Demand for
A Resource

16
14
12
10
8
6
4

D=MRP

2
0
-2

1

2

3

4

5

6

7

Quantity of Resource Demanded

12-6


MRP as Resource Demand
(1)
(2)
(3)
(4)
(5)
(6)
Units of Total Product
Marginal
Product Total Revenue, Marginal Revenue
Resource
(Output)
Product (MP) Price
(2) X (4)
Product (MRP)

0
1

2
3
4
5
6
7

0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28

$2.80
2.60
2.40
2.20
2.00
1.87
1.75
1.65

7
6
5
4

3
2
1

$ 0.00
18.20
31.20
39.60
44.00
46.25
47.25
46.20

]
]
]
]
]
]
]

$18.20
13.00
8.40
4.40
2.25
1.00
-1.05

$18

Resource Wage
(Wage Rate)

Imperfectly
Competitive
Firm’s
Demand for
A Resource

16
14

D=MRP
(Pure Competition)

12
10
8
6

D=MRP
(Imperfect
2 Competition)
4
0
-2

1

2

3

4

5

6

7

Quantity of Resource Demanded

12-7


Resource Demand
• Amount purchased at different
resource prices, all else the same
– For the firm, equal to MRP
– Market demand equals sum of firm
demand

• Downsloping because of DMR
– Changes in price for imperfect
competition
12-8

Determinants of
Resource Demand
• Changes in product demand
• Changes in productivity
– Quantities of other resources
– Technological advance
– Quality of variable resource

12-9


Determinants of
Resource Demand
• Changes in the price of
substitute resources
– Substitution effect
– Output effect
– Net effect

• Changes in the price of
complementary resources
12-10


Employment Trends
• Rising employment
– Services
– Health care
– Computers

• Declining employment
– Labor saving technological change
– Textiles
12-11


Elasticity of Resource Demand
Erd =

Percentage Change in Resource Quantity
Percentage Change in Resource Price

• Ease of resource substitutability
• Elasticity of product demand
• Ratio of resource cost to total
cost
12-12


Optimal Combination of Resources
• All resource inputs are variable
• Choose optimal combination
• Minimize cost of producing a
given output
• Maximize profit
12-13


The Least Cost Rule
• Minimize cost of producing a given

output
• Last dollar spent on each resource
yields the same marginal product
Marginal Product
Of Labor (MPL)
Price of Labor (PL)

=

Marginal Product
Of Capital (MPC)
Price of Capital (PC)
12-14


Profit Maximizing Rule
• MRP of each resource equals
its price
PL = MRPL and
MRPL
PL

=

PC = MRPC
MRPC
PC

=1
12-15

Income Distribution
• Paid according to value of service
– Workers
– Resource owners

• Inequality
– Productive resources unequally
distributed

• Market Imperfections
12-16


Case of ATM’s
•
•
•
•
•
•
•
•

Input substitution
Banks use ATMs instead of people
Least-cost combination of resources
ATMs debut about 35 years ago
11 billion U.S. transactions per year

80,000 tellers eliminated1990-2000
Former tellers find new jobs
Customer convenience
12-17


Key Terms
•
•
•
•
•
•
•
•
•
•
•

derived demand
marginal product (MP)
marginal revenue product (MRP)
marginal resource cost (MRC)
MRP=MRC rule
substitution effect
output effect
elasticity of resource demand
least-cost combination of resources
profit-maximizing combination of resources
marginal productivity theory of income

distribution
12-18


Next Chapter Preview…

Wage
Determination

12-19