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Resource Markets. 1. Introduction. Introduction. Productive assets are bought and sold in resource markets. These markets help determine what is produced, how it is produced, and the distribution of income. S. Product. Markets. D. Business Firms. Households. S. Resource. Markets. D.

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Resource Markets

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Introduction l.jpg
Introduction

  • Productive assets are bought and sold in resource markets.

  • These markets help determine what is produced, how it is produced, and the distribution of income.


The market for resources l.jpg

S

Product

Markets

D

Business Firms

Households

S

Resource

Markets

D

The Market for Resources

  • Until now we have focused on the product markets, where house- holds demand goods and services supplied by firms (upper loop).

  • Now we turn to resource market, where firms demand factors of production - human capital and physical capital which are supplied by households in exchange for income (bottom loop).


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2. Human and Non-human Resources


Human and non human resources l.jpg
Human and Non-human Resources

  • There two classes of productive resources:

  • Non-human resources

    • Physical capital

    • Land

    • Natural resources

  • Human resources

    • Composed of skills and knowledge of workers


Human and non human resources7 l.jpg
Human and Non-human Resources

  • Investment in human capital refers to activities that increase the human capital and productivity of individuals.

    • Ex: education, training, experience.


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22,746

14,957

32,611

22,656

39,367

26,562

55,832

37,319

71,225

46,072

93,106

60,468

Education Leads to Higher Earnings

Level ofSchooling

Less than9th Grade

Men

  • To the right are the mean earnings of males and females by degree of education for 1997.

Women

HighSchool

Some College

  • The earnings of both men and women increased with education.

Bachelor’sDegree

  • Note, though, that women’s earnings were only about 2/3 those of similarly educated men.

Master’sDegree

DoctoralDegree

0

20,000

40,000

60,000

80,000

100,000

1997 Mean Earnings of Year-Round Full-Time Workers



Demand for resources l.jpg
Demand for Resources

  • The demand for resources is derived from the demand for the products that the resources help produce.

  • ex: A service station hires mechanics because of their customers’ demand for repair services.


Demand for resources11 l.jpg

B

A

Demand for Resources

Price of Resource

  • As the price of a resource increases, producers that use the resource intensely will:

  • turn to substitute resources, and/or

  • face higher costs

P2

P1

D

Q2

Q1

Quantity of Resource


Time and the demand for resources l.jpg

C

B

A

Dlr

Time and the Demand for Resources

Price of Resource

  • the easier it is for firms to switch to substitute inputs, and/or

  • the more elastic the demand for the products the resource helps to produce.

P2

  • As has been demonstrated here, the long-run demand for a resource is almost always more elastic than the demand in the short-run.

P1

Dsr

Q3

Q2

Q1

Quantity of Resource


Factors shifting resource demand curves l.jpg
Factors Shifting Resource Demand Curves

  • A change in the demand for a product will cause the demand for the resources used to produce the product to change in the same direction.

  • Change in the productivity of a resource will alter resource demand.

    • If productivity of a resource rises, the demand for the resource will rise.


Factors shifting resource demand curves14 l.jpg
Factors Shifting Resource Demand Curves

  • A change in the price of related inputs will alter the demand for a resource.

  • The following will increase the demand for a resource:

    • an increase in the price of a substitute input

    • a decrease in the price of a complimentary input

  • The following will decrease the demand for a resource:

    • a decrease in the price of a substitute input

    • an increase in the price of a complimentary input



Hiring decision l.jpg

* Decision

MarginalProduct

=

MarginalRevenue

MRP

Hiring Decision

  • Profit-maximizing firms will hire additional units of a resource up to the point where the marginal revenue product of the resource equals its price

  • Marginal revenue product (MRP) is the change in total revenue that results from the employment of an additional unit of a resource.


Short run demand schedule of a firm l.jpg

$ 0 Decision

$200

0

0.0

-----

$200

5.0

5.0

$1,000

1

2

$200

4.0

9.0

$1,800

3

$200

3.0

12.0

$2,400

$200

2.0

14.0

4

$2,800

$200

1.5

5

15.5

$3,100

1.0

16. 5

$200

$3,300

6

0.5

17.5

$3,400

7

$200

Short-run Demand Schedule of a Firm

  • In the numerical example below, a computer company uses both technology and data-entry operators to provide services in a competitive market. For each unit processed the firm receives $200 (4).

  • Column (2) shows how total output changes as additional data-entry operators are hired (given a fixed capital level).

  • The Marginal Revenue Product schedule (6) indicates how hiring an additional operator affects the total revenue of the firm.

MPchange in (2)change in (1)(3)

Units of Variable

Factor(1)

TotalRevenue(2) * (4)(5)

Sales Price(Per Unit)(4)

MRP

(3) * (4)(6)

Total

Output(units per week)

(2)

----

1000

800

600

400

300

200

100



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Supply of Resources Decision

  • The amount of a resource supplied is directly related to its price.

  • The supply curve represents the best allocation of w worker’s time between work and leisure at each price.

  • The short-run supply elasticity of a resource is determined by how easily the resource can be transferred from one use to another, or resource mobility.

    • If resources are highly mobile than the supply curve will be elastic even in the short run.


Supply of a resource l.jpg

B Decision

A

Supply of a Resource

Price of Resource

S

  • As the price of a resource increases, individuals have a greater incentive to supply it.

P2

  • Therefore, a direct relationship will exist between the price of a resource and the quantity supplied.

P1

Q1

Q2

Quantity of Resource


Typical labor supply l.jpg
Typical Labor Supply Decision

When a person’s wage rate rises….

1. Substitution effect: Leisure becomes more expensive...

Worker will want to work more

2. Income effect: Worker has increased wealth to spend on other things...

Worker will want to work less

Which effect is stronger depends on...

A. Wage levels

B. Personal preferences


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Price of Resource Decision

Income effects outweigh

substitution effects

Income effects balance substitution effects

Substitution effects outweigh

income effects

Quantity of Resource


Time and the elasticity of supply for resources l.jpg

S Decisionlr

B

C

A

  • Given more time, the supply of the resource (CPAs) becomes more elastic (Ssr Slr) as more individuals choose this field of training:

Time and the Elasticity of Supply for Resources

Price of Resource

  • The supply of Certified Public Accountant (CPA) services is an example of a resource that requires a substantial period of time before the current investment is realized in the future expansion of quantity supplied.

Ssr

  • If the wage for CPA’s increases from P1 to P2, the short-run response will be an increase in CPA services from Q1 to Q2. Some CPAs work more hours and some CPAs come out of retirement.

P2

P2

P1

  • Now at the higher wage (P2) the quantity supplied in the market is Q3.

  • As has been demonstrated here, the long-run supply of a resource is almost always more elastic than the supply of that resource in the short-run.

Q1

Q2

Q3

Quantity of Resource


Factors that shift the market labor supply curve l.jpg
Factors that shift the Market Labor Supply Curve Decision

A change in...

  • birth rates

  • immigration policy

  • social security rules and provisions

  • attitudes



Resource prices l.jpg
Resource Prices Decision

  • The prices of resources are determined by supply and demand.

  • Changes in the market prices of resources will influence the decisions of both users and suppliers.

    • Higher resource prices give users a greater incentive to use substitutes.

    • Higher resource prices give suppliers a greater incentive to provide more of the resource.


Equilibrium in a resource market l.jpg

S Decision

A

D

Equilibrium in a Resource Market

Price(Wage)

  • The market demand for a resource, such as engineering, is a downward sloping curve, reflecting the declining MRP of the resource.

  • The market supply curve slopes upward since higher resource prices (wages) will induce individuals to supply more of a resource.

P1

  • Resource price P1 brings the choices of buyers and sellers into harmony.

  • At the equilibrium price (P1), the quantity demanded will just equal the quantity supplied.

Q1

Quantity of Engineering Services


Coordinating function of resource prices l.jpg
Coordinating Function Decision of Resource Prices

  • Changes in resource prices in response to changing market conditions are essential for efficient allocation of resources.

  • Profit is a reward that accrues to entrepreneurs who are able to see and act on opportunities to put resources to higher valued uses.


Adjusting to dynamic change l.jpg

S Decisionsr

Slr

D2

D2

D1

D1

Adjusting to Dynamic Change

  • will lead to an increase in demand for the services of construction engineers (resources market).

  • An increase in demand for housing (product market) . . .

  • In the product market, the equilibrium price of houses increases to P2, with output level Q2.

In the resources market, initially the equilibrium resource price will increase substantially (from P1to P2, with quantity supplied adjusting to Q2) as the supply of the resource is highly inelastic in the short-run.

  • The higher resource price will attract additional human capital investments and, with time, the resource supply curve will become more elastic, moderating the resource price (P2decreases to P3) and increasing its quantity supplied (to Q3).

Price

Price(wage)

S

P2

P2

P3

P1

P1

Q1

Q3

Q1

Q2

Quantity

Quantity

ProductMarket

ResourcesMarket

Q2


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