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25. The Demand For Resources. 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

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The Demand For Resources

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The demand for resources

25

The Demand

For Resources


Chapter objectives

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


Significance of resource pricing

Significance of Resource Pricing

  • Money-Income Determination

  • Cost Minimization

  • Resource Allocation

  • Policy Issues


Significance of resource pricing1

Significance of Resource Pricing

  • Why study it?

  • Money-income determination – resource prices determine income of households (wages, rent, etc.)

  • Cost minimization – resource prices are a cost to the firm

  • Resource allocation – resource prices allocate resources among industries and firms

  • Policy issues – how much control should gov have?


Marginal productivity theory of resource demand

Marginal Productivity Theory of Resource Demand

  • Resource Demand as a Derived Demand

  • Marginal Revenue Product

    • Productivity

      • Marginal Product (MP)

    • Product Price

      • Marginal Revenue Product (MRP)


Marginal product theory of resource demand

Marginal Product Theory of Resource Demand

  • In a purely competitive resource market, the firm is a “wage taker”

  • The firm hires such a negligible fraction of total resource supply that its hiring decisions do not influence resource price


Resource demand as a derived demand

Resource Demand as a Derived Demand

  • Demand for resource is inverse relationship b/w price of resource and QD

  • Is a derived demand – derived from the products that the resources help to produce

  • Ex. Demand for tax preparation assistance can lead to demand for accountants


Marginal revenue product

Marginal Revenue Product

  • Strength of demand for resource depends on:

  • Productivity of resource (MP)

  • Price of g/s it will produce (MRP)

  • Productivity – marginal product – additional output from using each additional unit of labor

  • Product Price – marginal revenue product – change in TR resulting from use of each additional unit of a resource


Rule for employing resources

Rule for Employing Resources

  • MRP =MRC

  • Marginal resource cost – amount that each additional unit of a resource adds to the firm’s total cost

  • It will be profitable to hire additional units of a resource up to the point at which a resources MRP=MRC

  • This rule is similar to the MR=MC rule, but we are now referring to inputs of a resource, not outputs of a product


Marginal productivity theory of resource demand1

Marginal

Revenue

Product

Change in Total Revenue

=

Unit Change in Resource Quantity

Marginal

Resource

Cost

Change in Total (Resource) Cost

=

Unit Change in Resource Quantity

Marginal Productivity Theory of Resource Demand

Rule for Employing Resources:

MRP = MRC

Marginal Revenue Product (MRP)

Marginal Resource Cost (MRC)


Mrp as resource demand schedule

MRP as Resource Demand Schedule

  • In a perfectly competitive labor market, the MRC of labor is equal to the market wage rate

  • In perfect competition, firm will hire workers up to the point at which the market wage rate (MRC) is equal to MRP

  • See Figure 25.1

  • D=MRP curve

  • Curve slopes downward because of diminishing returns


Mrp as resource demand

(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)

]

]

]

]

]

]

]

]

]

]

]

]

]

]

$18

16

14

12

10

8

6

4

2

0

1

2

3

4

5

6

7

-2

MRP as Resource Demand

MRP as Resource Demand Schedule

0

1

2

3

4

5

6

7

0

7

13

18

22

25

27

28

$2

2

2

2

2

2

2

2

$ 0

14

26

36

44

50

54

56

$14

12

10

8

6

4

2

7

6

5

4

3

2

1

Purely

Competitive

Seller’s

Demand for

A Resource

Resource Wage

(Wage Rate)

D=MRP

Quantity of Resource Demanded


Mrp as resource demand1

(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)

]

]

]

]

]

]

]

]

]

]

]

]

]

]

W 25.1

$18

16

14

12

10

8

6

4

2

0

1

2

3

4

5

6

7

-2

MRP as Resource Demand

MRP as Resource Demand Schedule

0

1

2

3

4

5

6

7

0

7

13

18

22

25

27

28

$2.80

2.60

2.40

2.20

2.00

1.87

1.75

1.65

$ 0.00

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

7

6

5

4

3

2

1

Imperfectly

Competitive

Seller’s

Demand for

A Resource

D=MRP

(Pure Competition)

Resource Wage

(Wage Rate)

D=MRP

(Imperfect

Competition)

Quantity of Resource Demanded


Resource demand under imperfect product market competition

Resource Demand Under Imperfect Product Market Competition

  • More complex when studying monopoly, oligopoly and monopolistic competition in the product market

  • See Figure 25.2

  • MRP falls for two reasons: diminishing marginal product and product price falls as output increases


Market demand for a resource

Market Demand for a Resource

  • Horizontal summation of all of the demand curves for all firms hiring that resource


Market demand for a resource1

Market Demand for a Resource

  • Determinants of Resource Demand –”Resource demand shifters”

    • 1. Changes in Product Demand

    • Inc. demand for new houses inc. demand for construction workers.

    • Changes in Productivity

      • Quantities of Other Resources

      • Technological Advance

      • Quality of Variable Resources

        Ex. New technological advance leads to higher quality labor, MRP shifts right


Market demand for a resource2

Market Demand for a Resource

  • 2.Changes in the Prices of Other Resources

    • Substitute Resources

      • Substitution Effect – decreases the demand for labor as it becomes substituted by machinery

      • Output Effect – greater output generally increases demand for labor

      • Net Effect – both substitution effect and output effect are present when input price changes, but they work in opposite directions

    • Complementary Resources – price of complementary resource drops, demand for original resource increases


In summary

In Summary

  • Demand for labor increases when:

  • Demand for product produced by labor increases

  • MP of labor increases

  • Price of substitute input decreases, assuming output effect exceeds substitution effect

  • Price of substitute input increases, assuming substitution effect exceeds output effect

  • Price of complementary input decreases


Occupational employment trends

Employment

Thousands

of Jobs

Employment

Thousands

of Jobs

Percentage

Increase

Percentage

Increase

Occupation

2004

2014

Occupation

2004

2014

Occupational Employment Trends

10 Most Rapidly Declining U.S.

Occupations

In Percentage Terms, 2004 - 2014

10 Fastest Growing 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

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

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%

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%

Source: Bureau of Labor Statistics


Elasticity of resource demand

Percentage Change in Resource Quantity

Erd =

Percentage Change in Resource Price

O 25.1

Elasticity of Resource Demand

  • Measures the extent to which producers change the quantity of a resource they hire when its price changes

  • 3 Factors:

  • Ease of Resource Substitutability – greater the substitutability of a resource, the more elastic the demand

  • Elasticity of Product Demand – greater the elasticity of product demand, the more elastic the demand

  • Ratio of Resource Cost to Total Cost – larger the proportion of total production costs accounted for by a resource, the more elastic the demand


Optimal combination of resources

Marginal Product

Of Capital (MPC)

Marginal Product

Of Labor (MPL)

=

Price of Capital (PC)

Price of Labor (PL)

Optimal Combination of Resources

  • The Least-Cost Rule

    • Least-Cost Combination of Resources


Optimal combination of resources1

Optimal Combination of Resources

  • What combination of resources will minimize costs at a specific level of output?

  • What combination of resources will maximize profit?


The least cost rule

The Least-Cost Rule

  • Firm is producing with the least-cost combination of resources when the last dollar spent on each resource yields the same marginal product

  • Cost of any output is minimized when the ratios of marginal product to price of the last units of resources used are the same for each resource


The profit maximizing rule

The Profit-Maximizing Rule

  • Firm will achieve profit-maximizing combination of resources when its MRP is equal to its resource price


Optimal combination of resources2

W 25.2

PL

=

MRPL

PC

=

MRPC

and

MRPL

MRPC

= 1

=

PL

PC

Optimal Combination of Resources

  • The Profit-Maximizing Rule

    MRP (Resource) = P (Resource)

  • Profit Maximizing Combination of Resources


Marginal productivity theory of income distribution

O 25.2

Marginal Productivity Theory of Income Distribution

  • Inequality

  • Market Imperfections


Input substitution

Input Substitution:

Last

Word

The Case of ATMs

  • 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%


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