The Demand For Resources

1. 25 The Demand For Resources

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

3. Significance of Resource Pricing • Money-Income Determination • Cost Minimization • Resource Allocation • Policy Issues

4. 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?

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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)

11. 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

12. (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

13. (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

14. 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

15. Market Demand for a Resource • Horizontal summation of all of the demand curves for all firms hiring that resource

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Optimal Combination of Resources • What combination of resources will minimize costs at a specific level of output? • What combination of resources will maximize profit?

23. 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

24. The Profit-Maximizing Rule • Firm will achieve profit-maximizing combination of resources when its MRP is equal to its resource price

25. 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

26. O 25.2 Marginal Productivity Theory of Income Distribution • Inequality • Market Imperfections

27. 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%