Chapter 14

The Demand for Resources

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14-2

Significance of Resource Pricing

• Determines money income for the household• Cost minimization• Resource allocation• Policy issues

LO1

14-3

Marginal Productivity Theory of Resource Demand

• Assume perfectly competition• Product markets• Resource markets

• Derived demand for resources depends on• Marginal product of the resource (MP)• Price of the product it produces (P)

LO2

14-4

Marginal Productivity Theory of Resource Demand

• Marginal revenue product (MRP)• Change in total revenue resulting from unit

change in resource input (labor)

Marginalrevenueproduct

=change in total revenue

change in resource quantity

LO2

14-5

Marginal Productivity Theory of Resource Demand

• Marginal resource cost (MRC)• Change in total resource cost resulting from

unit change in resource input (labor)

Marginalresource

cost=

change in total costchange in resource quantity

LO2

14-6

Marginal Productivity Theory of Resource Demand

• MRP = MRC rule• To maximize profit, hire additional resources

as long as the additional product produced adds more to revenues than to costs

• MRP schedule equals the firm’s demand for labor

• MRC exactly equal to wage rate

LO2

14-7

MRP as Resource Demand

Reso

urce

wag

e(w

age

rate

)

Quantity of resource demanded

(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)

01234567

07

131822252728

7654321

$22222222

$ 014263644505456

$141210

8642

]]]]]]]

]]]]]]]

1 2 3 4 5 6 7

0

-2

2

4

6

8

10

12

14

16

$18

D=MRP

Purelycompetitivefirm’sdemand fora resource

LO2

14-8

Imperfectlycompetitivefirm’sdemand fora resource

MRP as Resource Demand

01234567

07

131822252728

7654321

$2.802.602.402.202.001.871.751.65

$ 0.0018.2031.2039.6044.0046.2547.2546.20

$18.2013.00

8.404.402.251.00

-1.05

]]]]]]]

]]]]]]]

1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Reso

urce

wag

e(w

age

rate

)

Quantity of resource demanded

D=MRP(Pure competition)

D=MRP(Imperfectcompetition)

(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)

LO2

14-9

Determinants of Resource Demand

• Changes in product demand• Changes in productivity• Quantities of other resources• Technological advance• Quality of the variable resource

LO3

14-10

Determinants of Resource Demand

• Changes in price of substitute resources• Substitution effect• Output effect• Net effect

• Changes in the price of complementary resources

LO3

14-11

Substitute and Complement Resources

The Effect of an Increase in the Price of Capital on the Demand for Labor

(2)Increase in the Price of Capital

(1)Relationship of Inputs

(a)Substitution Effect

(b)Output Effect

(c)Combined Effect

Substitutes in production

Labor substituted for capital

Production costs up, output down, and less of both capital and labor used

DL increases if the substitution effect exceeds the output effect; DL decreases if the output effect exceeds the substitution effect

Complements in production

No substitution of labor for capital

Production costs up, output down, and less of both capital and labor used

DL decreases (because only the output effect applies)

LO3

14-12

Determinants of Resource Demand

Determinant ExamplesChange in product demand

Gambling increases in popularity, increasing the demand for workers at casinos.Consumers decrease their demand for leather coats, decreasing the demand for tanners.The Federal government increases spending on homeland security, increasing the demand for security personnel.

Change in productivity An increase in the skill levels of physicians increases the demand for their services.Computer-assisted graphic design increases the productivity of , and the demand for, graphic artists.

Change in the price of another resource

An increase in the price of electricity increases the cost of producing aluminum and reduces the demand for aluminum workers.The price of security equipment used by businesses to protect against illegal entry falls, decreasing the demand for night guards.The price of cell phone equipment decreases, reducing the cost of cell phone service; this in turn increases the demand for cell phone assemblers.Health-insurance premiums rise, and firms substitute part-time workers who are not covered by insurance for full-time workers who are.

LO3

14-13

Occupational Employment Trends

• Rising employment in health services• Personal care aides• Home health aides• Biomedical engineers

• Declining employment• Shoe machine operators• Postal service mail sorters• Postal service clerks

LO3

14-14

Employment TrendsThe 10 Fastest Growing U.S. Occupations in Percentage Terms 2010-2020

Employment,Thousands of Jobs

Occupation 2010 2020Percentage

Increase

Personal care aides 861 1,468 70.5

Home health aides 1,018 1,724 69.4

Biomedical engineers 16 25 61.7

Masonry helpers 29 47 60.1

Carpentry helpers 47 72 55.7

Veterinary technologists and technicians 80 122 52.0

Iron and rebar workers 19 28 48.6

Physical therapist assistants 67 98 45.7

Piping and plumbing helpers 58 84 45.4

Meeting, convention, and event planners 72 103 43.7LO3

14-15

Employment Trends

The 10 Most Rapidly Declining U.S. Occupations in Percentage Terms 2010-2020

Employment,Thousands of Jobs

Occupation 2010 2020Percentage

Increase

Shoe machine operators 3 2 53.4

Postal service mail sorters 142 73 48.5

Postal service clerks 66 34 48.2

Fabric/apparel pattern makers 6 4 35.6

Postmasters/mail superintendents 25 18 27.8

Sewing machine operators 163 121 25.8

Switchboard operators 143 110 23.3

Textile cutting machine operators 15 12 21.8

Textile knitting/weaving machine operators 23 18 18.2

Semiconductor processors 21 17 17.9LO3

14-16

Elasticity of Resource Demand

• 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

LO4

14-17

Optimal Combination of Resources

• What combination of resources will minimize costs at a specific output level?

• Least–cost combination of resources• Least cost rule• What combination of resources will maximize

profit?• Profit-maximizing combination of resources• Profit maximizing rule

LO5

14-18

Least Cost Rule

• Minimize cost of producing a given output• Last dollar spent on each resource yields the

same marginal product

Marginal productof labor (MPL)

Price of labor (PL)

Marginal productof capital (MPC)

Price of capital (PC)=

LO5

14-19

Profit Maximizing Rule

• Each resource is employed to the point where its MRP is equal to its price

MRPL

PL

MRPC

PC

= = 1

MRPLPL = MRPCPC =and

LO5

14-20

Numerical Example

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

LO5

(1)Quantity

(2)Total

Product(Output)

(3)MarginalProduct

(4)Total

Revenue

(5)MarginalRevenueProduct

01234567

012222833374042

1210

65432

$ 024445666748084

$24201210

864

]]]]]]]

]]]]]]]

(1 )′Quantity

(2 )′Total

Product(Output)

(3 )′MarginalProduct

(4 )′Total

Revenue

(5 )′MarginalRevenueProduct

01234567

013222832353738

]]]]]]]

13964321

$ 026445664707476

]]]]]]]

$261812

8642

Labor (Price = $8) Capital (Price = $12)

14-21

Income Distribution

• Marginal productivity theory of income distribution

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

• Inequality• Productive resources unequally distributed

• Market imperfections

LO6

14-22

Input Substitution: The Case of ATMS

• Banks use ATMS instead of human tellers• Least cost combination of resources• ATMS debuted about 45 years ago• 80 billion US transactions per year• Former tellers find new jobs• Customer convenience