Lecture Economics (19/e) - Chapter 12: The demand for resources

12
The Demand for Resources

McGraw­Hill/Irwin

        Copyright © 2012 by The McGraw­Hill Companies, Inc. All rights reserved.


Resource Pricing

• Firms demand resources
• Focus on labor
• Resource prices are important
• Money-income determination
• Cost minimization
• Resource allocation
• Policy issues
LO1

12-2


Resource Demand

• All markets are competitive
(good and resource)

• Derived demand depends on:
• Productivity of resource (MP)
• Price of the good it helps produce (P)
• Marginal revenue product (MRP)

• Change in TR resulting from unit
change in resource (labor)
LO1

12-3


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

LO1

=

Change in Total (Resource) Cost
Unit Change in Resource Quantity
12-4


MRP as Resource Demand
(1)
(2)
(3)
Units of Total Product
Marginal
Resource
(Output)
Product (MP)

0
1
2
3
4
5
6
7

0]
7]
13 ]
18 ]
22 ]
25 ]

27
]
28

(4)
Product
Price

(5)
Total Revenue,
(2) X (4)

$2
2
2
2
2
2
2
2

7
6
5
4
3
2
1

$0

14
26
36
44
50
54
56

]
]
]
]
]
]
]

(6)
Marginal Revenue
Product (MRP)

$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

D=MRP

4
2
0
-2

1

2

3

4

5

6

7

Quantity of Resource Demanded
LO1

12-5


MRP as Resource Demand
(1)
(2)
(3)
Units of Total Product
Marginal
Resource
(Output)
Product (MP)

0
1
2
3
4
5
6

7

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

(4)
Product
Price

(5)
Total Revenue,
(2) X (4)

$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

]
]
]
]
]
]
]

(6)
Marginal Revenue
Product (MRP)

$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
10
8
6
4
2
0
-2

LO1

D=MRP

(Pure Competition)

12

D=MRP
(Imperfect
Competition)
1

2

3

4

5

6

7

Quantity of Resource Demanded

12-6


Determinants of Resource Demand

• Changes in product demand
• Changes in productivity

• Quantities of other resources
• Technological advance
• Quality of the variable resource

LO2

12-7


Determinants of Resource Demand

• Changes in the price of substitute

•

LO2

resources
• Substitution effect
• Output effect
• Net effect
Changes in the price of
complementary resources

12-8


Occupational Employment Trends

• Rising employment

• Services
• Health care
• Computers
• Declining employment
• Labor saving technological change
• Textiles
LO2

12-9


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

LO2

12-10


Optimal Combination of Resources

• All resource inputs are variable

• Choose the optimal combination
• Minimize cost of producing a given
output

• Maximize profit

LO3

12-11


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)

LO3

=

Marginal Product
Of Capital (MPC)
Price of Capital (PC)

12-12


Profit Maximizing Rule

• MRP of each resource equals its
price
PL = MRPL and PC = MRPC
MRPL
PL

LO3

=

MRPC
PC

=1

12-13


Income Distribution

• Paid according to value of service
• Workers
• Resource owners
• Inequality

• Productive resources unequally
•
LO3

distributed
Market imperfections

12-14


Income Distribution

• Numerical Illustration
• Data for finding the least-cost and
profit-maximizing combination of
labor and capital

12-15