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

Chapter 12 - The demand for resources. In this chapter, students will be able to understand: Explain the significance of resource pricing, convey how the marginal revenue productivity of a resource relates to a firm''s demand for that resource, list the factors that increase or decrease resource demand, discuss the determinants of elasticity of resource demand, determine how a competitive firm selects its optimal combination of resources.

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The Demand For Resources

Chapter 12

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

Rule for employing resources:

• MRP = MRC

Marginal Revenue

Unit Change in Resource Quantity

Marginal Resource

Unit Change in Resource Quantity

Resource Demand

12-5

MRP as Resource Demand

(1)

Units of

Resource

(2) Total Product (Output)

(3) Marginal Product (MP)

(4) Product Price

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

(6) Marginal Revenue Product (MRP) 0

1

2

3

4

5

6

7

0 7 13 18 22 25 27 28

7 6 5 4 3 2 1

$2 2 2 2 2 2 2 2

$ 0 14 26 36 44 50 54 56

$14 12 10 8 6 4 2

] ] ] ] ] ] ]

] ] ] ] ] ] ]

1 2 3 4 5 6 7 0

-2

2 4 6 8 10 12 14 16

$18

Quantity of Resource Demanded

D=MRP

Purely

Competitive

Firm’s

Demand for

A Resource

12-6

Units of

Resource

(2) Total Product (Output)

(3) Marginal Product (MP)

(4) Product Price

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

(6) Marginal Revenue Product (MRP) 0

1

2

3

4

5

6

7

0 7 13 18 22 25 27 28

7 6 5 4 3 2 1

$2.80 2.60 2.40 2.20 2.00 1.87 1.75 1.65

$ 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

] ] ] ] ] ] ]

] ] ] ] ] ] ]

1 2 3 4 5 6 7 0

-2

2 4 6 8 10 12 14 16

$18

Quantity of Resource Demanded

D=MRP

(Pure Competition)

Imperfectly

Competitive

Firm’s

Demand for

A Resource

D=MRP

(Imperfect Competition)

MRP as Resource Demand

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

• Changes in the price of

substitute resources

–Substitution effect

–Output effect

–Net effect

• Changes in the price of

complementary resources

Determinants of Resource Demand

12-10

Employment Trends

• Rising employment

–Services

–Health care

–Computers

• Declining employment

–Labor saving technological change –Textiles

12-11

Elasticity of Resource Demand

• Ease of resource substitutability

• Elasticity of product demand

• Ratio of resource cost to total

cost

Erd = Percentage Change in Resource Quantity Percentage Change in Resource Price

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

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