The DemandFor Resources

Chapter 12

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill 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

Rule for employing resources: • MRP = MRC

MarginalRevenueProduct

=Change in Total Revenue

Unit Change in Resource Quantity

MarginalResource

Cost=

Change in Total (Resource) Cost

Unit Change in Resource Quantity

• Marginal Revenue Product (MRP)

• Marginal Resource Cost (MRC)

Resource Demand

12-5

MRP as Resource Demand(1)

Units ofResource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

01234567

07

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$22222222

$ 014263644505456

$1412108642

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1 2 3 4 5 6 70-2

2

4

6

8

10

12

14

16

$18

Res

ourc

e W

age

(Wag

e R

ate)

Quantity of Resource Demanded

D=MRP

PurelyCompetitiveFirm’sDemand forA Resource

12-6

(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

$2.802.602.402.202.001.871.751.65

$ 0.0018.2031.2039.6044.0046.2547.2546.20

$18.2013.008.404.402.251.00

-1.05

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1 2 3 4 5 6 70-2

2

4

6

8

10

12

14

16

$18

Res

ourc

e W

age

(Wag

e R

ate)

Quantity of Resource Demanded

D=MRP(Pure Competition)

ImperfectlyCompetitiveFirm’sDemand forA Resource

D=MRP(ImperfectCompetition)

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 ProductOf Labor (MPL)

Price of Labor (PL)

Marginal ProductOf Capital (MPC)

Price of Capital (PC)=

12-14

Profit Maximizing Rule

• MRP of each resource equals its price

MRPL

PL

MRPC

PC= = 1

MRPLPL = MRPCPC =and

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

distribution12-18

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WageDetermination

12-19