27 - 1Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

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The Demand for Resources

27C H A P T E R

27 - 2Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

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EndShow

SIGNIFICANCE OFRESOURCE PRICING

•Money Income Determination

•Resource Allocation

•Cost Minimization

•Ethical Questions and Policy Issues

27 - 3Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

MARGINAL PRODUCTIVITYTHEORY OF RESOURCE DEMAND

Resource Demand as a Derived Demand

Marginal Revenue Product (MRP)•Productivity

•Marginal Product (MP)•Product Price

MarginalRevenueProduct

=Change in Total Revenue

Unit change in Resource Quantity

27 - 4Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

MARGINAL PRODUCTIVITYTHEORY OF RESOURCE DEMAND

Rule for Employing Resources:

MRP = MRC

MarginalRevenue

Cost=

Change in Total (Resource) Cost

Unit change in Resource Quantity

27 - 5Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

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EndShow

Percentage of Labor Force0 25 50 75 100

DevelopingCountries

IndustriallyAdvancedCountries

UnitedStates

Agriculture

Agriculture

Agriculture

Industry

Industry

IndustryServices

Services

Services

GLOBAL PERSPECTIVELabor Demand and Allocation: Selected Nations

Source: International Labour Organization

27 - 6Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

Units ofResource

TotalProduct(Output)

Marginalproduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)

Quantity of resource demanded

Pure CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

]]]]]]

0 0 $2 $ 0

Consider the case ofresource demand under

Pure Competition

27 - 7Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

Units ofResource

TotalProduct(Output)

Marginalproduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)

Quantity of resource demanded

Pure CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

01

0 7

7$2 2

$ 0 14

$ 14

27 - 8Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

Units ofResource

TotalProduct(Output)

Marginalproduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)

Quantity of resource demanded

Pure CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

012

0 713

76

$2 2 2

$ 0 14 26

$ 14 12

27 - 9Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

Units ofResource

TotalProduct(Output)

Marginalproduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)

Quantity of resource demanded

Pure CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

0123

0 71318

765

$2 2 2 2

$ 0 14 26 36

$ 14 12 10

27 - 10Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

Units ofResource

TotalProduct(Output)

Marginalproduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)

Quantity of resource demanded

Pure CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

01234567

0 7131822252728

7654321

$2 2 2 2 2 2 2 2

$ 0 14 26 36 44 50 54 56

$ 14 12 10 8 6 4 2

The purely competitiveseller’s demand fora resource

27 - 11Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

Units ofResource

TotalProduct(Output)

Marginalproduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)

Quantity of resource demanded

Pure CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

01234567

0 7131822252728

7654321

$2 2 2 2 2 2 2 2

$ 0 14 26 36 44 50 54 56

$ 14 12 10 8 6 4 2

The purely competitiveseller’s demand fora resource

Now, consider the caseof resource demand under

Imperfect Competition

27 - 12Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

Units ofResource

TotalProduct(Output)

Marginalproduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)

Quantity of resource demanded

Imperfect CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

01234567

0 7131822252728

7654321

$2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65

$ 0 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

The imperfectlyCompetitive seller’sdemand for a resource

27 - 13Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

DETERMINANTS OF RESOURCE DEMAND

Changes in Product Demand

Changes in Productivity• Quantities of Other

Resources• Technological Progress• Quality of the Variable

Resource

27 - 14Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

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EndShow

DETERMINANTS OF RESOURCE DEMAND

Changes in the Prices of Other Resources

Substitute Resources• Substitution Effect• Output Effect• Net Effect

Complementary ResourcesOccupational Employment

Trends

27 - 15Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

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EndShow

ELASTICITY OF RESOURCE DEMAND

Rate of MP Decline

Ease of Resource Substitutability

Elasticity of Product Demand

Ratio of Resource Cost to Total

Cost Ratio

Erd = Percentage change in resource price

Percentage change in resource quantity

27 - 16Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

OPTIMUM COMBINATIONOF RESOURCES

Least-Cost Rule

Profit-Maximizing Combination

MP of Labor MP of Capital

Price of Labor Price of Capital

MRPL

PL

MRPC

PC1

Least-Cost Combination of Resources

27 - 17Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

MARGINAL PRODUCTIVITY THEORYOF INCOME DISTRIBUTION

Inequality

Market Imperfections

ChapterConclusions

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 distributionENDBACKCopyright McGraw-Hill/Irwin 2002

27 - 19Copyright McGraw-Hill/Irwin, 2002

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

PreviousSlide

NextSlide

EndShow

Wage Determination

Chapter 28

NEXT