Copyright 2008 The McGraw-Hill Companies 25-1 25 The Demand For Resources.
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Transcript of Copyright 2008 The McGraw-Hill Companies 25-1 25 The Demand For Resources.
Copyright 2008 The McGraw-Hill Companies25-2
Chapter Objectives• The Significance of Resource
Pricing• How the Marginal Revenue
Productivity of a Resource Relates to a Firm’s Demand for that Resource
• The Factors that Increase or Decrease Resource Demand
• The Determinants of Elasticity of Resource Demand
• How a Competitive Firm Selects its Optimal Combination of Resources
Copyright 2008 The McGraw-Hill Companies25-3
Turn from the product market to the resource (input or factor) market
• Roles of supply and demand are reversed: firms demand the resources, people supply them, as in the labor market
• Resource demand is a derived demand, that is, derived from the demand for the product being produced.
Copyright 2008 The McGraw-Hill Companies25-4
Why study resource markets?• Money-Income Determination: most
household income comes from supplying resources such as labor.
• Cost Minimization: resource prices are costs to a firm, and firms have an incentive to use the least costly methods of production.
• Resource Allocation: resource prices affect what resources will be used and to what extent.
• Policy Issues: often involve resource prices and related issues, tax policy, minimum wage laws, union behavior, etc.
Copyright 2008 The McGraw-Hill Companies25-5
As in product market, different kinds of resource markets
• Begin with a purely competitive resource market, price of the resource is determined by supply and demand for the resource
• What is the profit maximizing quantity of a resource that a firm should use?
Copyright 2008 The McGraw-Hill Companies25-6
Here, we assume a purely competitive resource market (and a purely competitive product market)
• Many buyers and sellers of the resource.
• Homogenous units of the resource.
• Firm is a resource price taker: their actions do not affect the price of the resource.
Copyright 2008 The McGraw-Hill Companies25-7
You already know a lot about resource markets.
• Use marginal analysis, hire the resource to the point where the added cost equals the added revenue
Copyright 2008 The McGraw-Hill Companies25-8
Marginal Productivity Theory of Resource Demand
• Marginal Product (MP): MP is the change in output that results from adding one more unit of resource, such as labor, to production.
• Marginal Revenue Product (MRP)• MRP is the change in total
revenue that results from adding one more unit of a resource, such as labor, to production
Copyright 2008 The McGraw-Hill Companies25-9
Marginal Productivity Theory of Resource Demand
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)
Copyright 2008 The McGraw-Hill Companies25-10
MRP as Resource DemandMRP as Resource Demand Schedule
(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
$22222222
$ 014263644505456
$141210
8642
]]]]]]]
]]]]]]]
1 2 3 4 5 6 70
-2
2
4
6
8
10
12
14
16
$18
Res
ou
rce
Wag
e(W
age
Rat
e)
Quantity of Resource Demanded
D=MRP
PurelyCompetitiveSeller’sDemand forA Resource
Copyright 2008 The McGraw-Hill Companies25-11
What is MRC equal to in a purely competitive labor market?
• The same as the market wage rate, that is, MRC = W (wage): recall in pure competition, the firm is a wage taker and hires a small fraction of the available labor, thus it can hire the labor it wants at the current market wage.
Copyright 2008 The McGraw-Hill Companies25-12
Resource markets
• In the previous example, if this is a labor market and the wage is $9, how many units of labor should this firm hire?
• Now make a slight change: assume a purely competition labor or resource market, but an IMPERFECTLY competitive product market (such as oligopoly, monopoly, etc) Cannot use a constant price as in previous example.
Copyright 2008 The McGraw-Hill Companies25-13
MRP as Resource DemandMRP as Resource Demand Schedule
(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
]]]]]]]
]]]]]]]
1 2 3 4 5 6 70
-2
2
4
6
8
10
12
14
16
$18
Res
ou
rce
Wag
e(W
age
Rat
e)
Quantity of Resource Demanded
D=MRP(Pure Competition)
ImperfectlyCompetitiveSeller’sDemand forA Resource
D=MRP(ImperfectCompetition)
W 25.1
Copyright 2008 The McGraw-Hill Companies25-14
Market Demand for a Resource• The market demand for a resource is the
horizontal sum of the MRP curves for all the firms using that resource. What causes this demand curve to shift?
1. Changes in Product Demand and product price
2. Changes in Productivity of the resource, which is affected by
• Quantities of Other Resources• Technological Advance• Quality of Variable Resources
Copyright 2008 The McGraw-Hill Companies25-15
Market Demand for a Resource3. Changes in the Prices of Other Resources
– Substitute Resources• Substitution Effect: the lower price of
one resource encourages firms to use more of that resource and less of others
• Output Effect: the lower price of one resource lowers overall costs, which encourages the firm to produce more output, which requires more of all resources.
• Net Effect: combines both the substitution and output effects.
– Complementary Resources
Copyright 2008 The McGraw-Hill Companies25-16
Occupational Employment Trends
10 Fastest Growing U.S. OccupationsIn Percentage Terms, 2004 - 2014
Home Health Aides
Data Communications
Analysts
Medical Assistants
Physician Assistants
Software Engineers,
Applications
Physical Therapist
Assistants
Dental Hygienists
Software Engineers,
Systems
Dental Assistants
Personal Home Care
Aides
Occupation
EmploymentThousands
of Jobs
2004 2014Percentage
Increase
624
231
387
62
460
59
158
340
267
701
974
357
589
93
682
85
226
486
382
988
56%
55%
52%
50%
48%
44%
43%
43%
43%
41%
10 Most Rapidly Declining U.S. Occupations
In Percentage Terms, 2004 - 2014
Meter Readers, Utilities
Textile Machine
Operators
Credit Authorizers,
Checkers, & Clerks
Railroad Brake, Signal,
& Switch Operators
Mailing Clerks
Sewing Machine
Operators
Telephone Operators
File Clerks
Computer Operators
Photographic Pro-
cessing Machine
Operators
Occupation
EmploymentThousands
of Jobs
2004 2014Percentage
Increase
50
148
67
17
160
256
39
255
149
54
27
81
39
11
101
163
25
163
101
38
-45%
-45%
-41%
-39%
-37%
-37%
-36%
-36%
-33%
-31%
Source: Bureau of Labor Statistics
Copyright 2008 The McGraw-Hill Companies25-17
Elasticity of Resource Demand
• What factors affect Erd?
1. Ease of Resource Substitutability
2. Elasticity of Product Demand
3. Ratio of Resource Cost to Total Cost
Erd =Percentage Change in Resource Quantity
Percentage Change in Resource Price
O 25.1
Copyright 2008 The McGraw-Hill Companies25-18
Optimal Combination of Resources
• The Least-Cost Rule
–Least-Cost Combination of Resources
Marginal ProductOf Labor (MPL)
Price of Labor (PL)
Marginal ProductOf Capital (MPC)
Price of Capital (PC)=
Copyright 2008 The McGraw-Hill Companies25-19
Optimal Combination of Resources
• The Profit-Maximizing Rule
MRP (Resource) = P (Resource)
• Profit Maximizing Combination of Resources
MRPL
PL
MRPC
PC
= = 1
MRPLPL = MRPCPC =and
W 25.2
Copyright 2008 The McGraw-Hill Companies25-20
Marginal Productivity Theory of Income Distribution
• Inequality
• Market ImperfectionsO 25.2
Copyright 2008 The McGraw-Hill Companies25-21
Input Substitution:
• Banks Using More ATMs at the Expense of Human Teller Jobs
• Consistency With Least-Cost Combination of Resources
• ATMs Debut About 35 Years Ago• Today Nearly 400,000 Perform About
11 Billion U.S. Transactions• 80,000 Human Tellers Eliminated
Between 1990 and 2000• Bank Customers Gain Convenience
of More Locations While Labor is “Freed-Up” for Other Possibly Better Positions Since Teller Turnover is about 50%
Last
Word The Case of ATMs
Copyright 2008 The McGraw-Hill Companies25-22
Key Terms• derived demand
• marginal product (MP)
• marginal revenue product (MRP)
• marginal resource cost (MRC)
• substitution effect
• output effect
• elasticity of resource demand
• least-cost combination of resources
• profit maximizing combination of resources
• marginal productivity theory of income distribution