The Demand For Resources
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Transcript of The Demand For Resources
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McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
The DemandFor Resources
Chapter 12
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Chapter Objectives
• Resource pricing• Marginal revenue productivity
and firm resource demand• Factors that affect resource
demand• Elasticity of resource demand• Optimal combination of
resources for the competitive firm
12-2
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Resource Pricing
• Firms demand resources–Focus on labor
• Resource prices are important–Money-income determination–Cost minimization–Resource allocation–Policy issues
12-3
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Resource Demand
• All markets are competitive (good and resource)
• Derived demand depends on:–Productivity of resource (MP)–Price of good it helps produce (P)
• Marginal revenue product (MRP)–Change in TR resulting from unit
change in resource (labor)
12-4
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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)
Resource Demand
12-5
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MRP as Resource Demand(1)
Units ofResource
(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
]]]]]]]
]]]]]]]
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$18
Res
ou
rce
Wag
e(W
age
Rat
e)
Quantity of Resource Demanded
D=MRP
PurelyCompetitiveFirm’sDemand forA Resource
12-6
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(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
]]]]]]]
]]]]]]]
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$18
Res
ou
rce
Wag
e(W
age
Rat
e)
Quantity of Resource Demanded
D=MRP(Pure Competition)
ImperfectlyCompetitiveFirm’sDemand forA Resource
D=MRP(ImperfectCompetition)
MRP as Resource Demand
12-7
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Resource Demand
• Amount purchased at different resource prices, all else the same–For the firm, equal to MRP
–Market demand equals sum of firm demand
• Downsloping because of DMR–Changes in price for imperfect
competition12-8
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Determinants of Resource Demand
• Changes in product demand
• Changes in productivity–Quantities of other resources
–Technological advance
–Quality of variable resource
12-9
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• Changes in the price of substitute resources–Substitution effect
–Output effect
–Net effect
• Changes in the price of complementary resources
Determinants of Resource Demand
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Employment Trends
• Rising employment–Services
–Health care
–Computers
• Declining employment–Labor saving technological change
–Textiles
12-11
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Elasticity of Resource Demand
• Ease of resource substitutability
• Elasticity of product demand
• Ratio of resource cost to total cost
Erd =Percentage Change in Resource Quantity
Percentage Change in Resource Price
12-12
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Optimal Combination of Resources
• All resource inputs are variable
• Choose optimal combination
• Minimize cost of producing a given output
• 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
Marginal ProductOf Labor (MPL)
Price of Labor (PL)
Marginal ProductOf Capital (MPC)
Price of Capital (PC)=
12-14
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Profit Maximizing Rule
• MRP of each resource equals its price
MRPL
PL
MRPC
PC
= = 1
MRPLPL = MRPCPC =and
12-15
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Income Distribution
• Paid according to value of service–Workers
–Resource owners
• Inequality–Productive resources unequally
distributed
• Market Imperfections12-16
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Case of ATM’s
• Input substitution• Banks use ATMs instead of people• Least-cost combination of resources• ATMs debut about 35 years ago• 11 billion U.S. transactions per year• 80,000 tellers eliminated1990-2000• Former tellers find new jobs• Customer convenience
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Key Terms
• 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
distribution12-18
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WageDetermination
12-19