12 - 1 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a...

12 - 1

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Optimum Combination of Resources

The Demand for Resources

12 - 2






CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

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RESOURCE PRICING

Firms demand resources• Land, labor, capital, &

entrepreneurs• Focus on labor

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RESOURCE DEMAND

Derived demand• Resource demand is

derived from product demand

Demand depends on• Productivity of resource

(MP)• Price of product being

made (P)

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RESOURCE DEMAND

Marginal Resource Cost(MRC)

MRC =ΔTotal (Resource) Cost

Δ Resource Quantity

MRP =Δ Total Revenue

Δ Resource Quantity

Marginal Revenue Product (MRP)

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Optimal solution:

MRP = MRC

Resource Demand

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Units ofResource

TotalProduct(Output)

MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

0 1 2 3 4 5 6 7 8 Q

W141210 8 6 4 2

Quantity of resource demanded

Perfect CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

]]]]]]

0 0 $2 $ 0

Consider the case ofresource demand under

Perfect Competition

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

W141210 8 6 4 2



]]]]]]

01

0 7

7$2 2

$ 0 14

$ 14

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

W141210 8 6 4 2



]]]]]]

012

0 713

76

$2 2 2

$ 0 14 26

$ 14 12

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

W141210 8 6 4 2



]]]]]]

0123

0 71318

765

$2 2 2 2

$ 0 14 26 36

$ 14 12 10

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

W141210 8 6 4 2



]]]]]]

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

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

W141210 8 6 4 2



]]]]]]

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

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

W141210 8 6 4 2


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

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

W141210 8 6 4 2


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

More Inelastic Than PC

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Optimal Combination of Resources

• All resource inputs are variable

• Choose an optimal combination–Minimize cost–Maximize profit

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The Least Cost Rule

• Minimize cost of producing a given output

• Last dollar spent on each resource yields the same marginal product

MP of Labor (MPL)

Price of Labor (PL)

MP of Capital (MPC)

Price of Capital (PC)=

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Profit Maximizing Rule

MRP of each resource equals its price

MRPL

PL

MRPC

PC

= = 1

MRPLPL = MRPCPC =and

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