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

Change in Total (Resource) Cost Unit Change in Resource Quantity

12-4

LO1

MRP as Resource Demand

(1) (2) Units of Total Product Resource (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
$18 16

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

Purely Competitive Firms Demand for A Resource

LO1

Resource Wage (Wage Rate)

14 12 10 8 6 4 2 0 -2 1 2 3 4 5 6 7

D=MRP

Quantity of Resource Demanded

12-5

MRP as Resource Demand

(1) (2) Units of Total Product Resource (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
$18 16

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

Imperfectly Competitive Firms Demand for A Resource

LO1

Resource Wage (Wage Rate)

14 12

D=MRP (Pure Competition)

10
8 6 4 2 0

D=MRP (Imperfect Competition)

1 2 3 4 5 6 7

-2

Quantity of Resource Demanded

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

resources Substitution effect Output effect Net effect Changes in the price of complementary resources

LO2

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) Marginal Product Of Capital (MPC) Price of Capital (PC)

Price of Labor (PL)

LO3

12-12

Profit Maximizing Rule

MRP of each resource equals its

price
PL = MRPL and PC = MRPC
MRPL PL MRPC PC

=1

LO3

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