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12

The Demand for Resources

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill 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)
Units of Total Product
Resource
(Output)

0
1
2
3
4
5
6
7

(3)
Marginal
Product (MP)

(4)
Product
Price

7
6
5
4
3
2
1

$2
2
2
2
2
2
2
2

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

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

$0
14
26
36
44
50
54
56

]
]
]
]
]
]
]

(6)
Marginal Revenue
Product (MRP)

$14
12
10
8
6
4
2

$18

Purely
Competitive
Firms
Demand for
A Resource

Resource Wage
(Wage Rate)

16
14
12
10
8
6

D=MRP

4
2
0
-2

Quantity of Resource Demanded


LO1

12-5

MRP as Resource Demand


(1)
(2)
Units of Total Product
Resource
(Output)

0
1
2
3
4
5
6
7

(3)
Marginal
Product (MP)

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

Imperfectly
Competitive
Firms
Demand for
A Resource

Resource Wage
(Wage Rate)

16
14

D=MRP
(Pure Competition)

12
10
8
6

4
2
0

D=MRP
(Imperfect
Competition)
1

-2

Quantity of Resource Demanded


LO1

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

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