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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.
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] 7] 13 ] 18 ] 22 ] 25 ] 27 ] 28 $2 2 2 2 $0 14 26 36 44 50 54 56 ] ] ] ] ] ] ] $14 12 10 $18 Resource Wage (Wage Rate) Purely Competitive Firm’s Demand for A Resource 16 14 12 10 D=MRP -2 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] 7] 13 ] 18 ] 22 ] 25 ] 27 ] 28 $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 $18 Resource Wage (Wage Rate) Imperfectly Competitive Firm’s Demand for A Resource 16 14 D=MRP (Pure Competition) 12 10 D=MRP (Imperfect Competition) -2 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 ... demand least-cost combination of resources profit-maximizing combination of resources marginal productivity theory of income distribution 1 2- 18 Next Chapter Preview… Wage Determination 1 2- 19 ... 50 54 56 ] ] ] ] ] ] ] $14 12 10 $18 Resource Wage (Wage Rate) Purely Competitive Firm’s Demand for A Resource 16 14 12 10 D=MRP -2 Quantity of Resource Demanded 1 2- 6 MRP as Resource Demand (1)... to total cost 1 2- 12 Optimal Combination of Resources • All resource inputs are variable • Choose optimal combination • Minimize cost of producing a given output • Maximize profit 1 2- 13 The Least