Resource Demand

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# Resource Demand - PowerPoint PPT Presentation

Resource Demand. Resource Demand. An increase in the demand for a product will increase the demand for a resource used in its production A decrease in product demand will decrease the demand for that resource. Changes in Productivity. Three ways to alter the productivity of any resource:

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## PowerPoint Slideshow about 'Resource Demand' - olathe

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### Resource Demand

Resource Demand
• An increase in the demand for a product will increase the demand for a resource used in its production
• A decrease in product demand will decrease the demand for that resource
Changes in Productivity
• Three ways to alter the productivity of any resource:
• Quantities of other resources
• Quality of the varied resource
Demand Curves to Shift
• Changes in prices of goods
• Changes in supply of other factors
• Changes in technology
1. Changes in prices of goods
• Factor Demand = Derived Demand
• P X MPL
Shifts of the Value of the Marginal Product Curve

(a) An Increase in the Price of Wheat

(b) A Decrease in the Price of Wheat

Wage rate

Wage rate

C

A

A

B

Market wage rate

\$200

\$200

MPL

1

MPL

MPL

3

2

MPL

1

0

5

8

0

2

5

Quantity of labor (workers)

Quantity of labor (workers)

2. Changes in supply of other factors
• George and Martha acquire more land!
• Each worker now produces more wheat because they have more land to work with
• What happens to the Marginal Product of Labor?
• MPL will rise at any given level of employment
Shifts of the Value of the Marginal Product Curve

(a) An Increase in the Price of Wheat

(b) A Decrease in the Price of Wheat

Wage rate

Wage rate

C

A

A

B

Market wage rate

\$200

\$200

MPL

1

MPL

MPL

3

2

MPL

1

0

5

8

0

2

5

Quantity of labor (workers)

Quantity of labor (workers)

3. Changes in technology
• Improved technology can increase or reduce demand for a given factor of production
• How can technological producer reduce factor demand?
• Ex. Horses and Transportation Revolution
• Usual effect of technological progress is to increase demand for a given factor
Elasticity of Resource Demand
• Measures the extent to which producers change the quantity of a resource they hire when its price changes
• Erd > 1 = resource demand is elastic
• Erd < 1 = resource demand is inelastic
• Erd = 1 = resource demand is unit-elastic
Elasticity of Resource Demand
• Sustainability is a fundamental determinant of elasticity
• The greater the sustainability of other resources, the more elastic is the demand for a particular resource
Elasticity of Resource Demand
• Demand for labor is a derived demand, the elasticity of the demand for the output that the labor is producing will influence the elasticity of the demand for labor
• Greater the price elasticity of product demand, the greater the elasticity of resource demand
Optimal Combination of Resources
• What combination of resources a firm will choose when ALL its inputs are variable?
• What combination of resources will minimize costs at a specific level of output?
• Least-cost combination of resources
• The last dollar spend on each resource yields that same MP
Optimal Combination of Resources
• Profit-Maximizing combination of resources is when each resource is employed to the point at which its marginal revenue product equals its resource price
• Labor – PL = MRPL
• Capital – PC = MRPC

### Resource Demand Notes

Resource Demand
• A decrease in product demand will decrease the demand for that resource
Changes in Productivity
• Three ways to alter the productivity of any resource:
Demand Curves to Shift
• Changes in _________________
• Changes in _________________
• Changes in _________________
1. Changes in prices of goods
• Factor Demand = _______________
• P X MPL
Shifts of the Value of the Marginal Product Curve

(a) An Increase in the Price of Wheat

(b) A Decrease in the Price of Wheat

Wage rate

Wage rate

C

A

A

B

Market wage rate

\$200

\$200

MPL

1

MPL

MPL

3

2

MPL

1

0

5

8

0

2

5

Quantity of labor (workers)

Quantity of labor (workers)

2. Changes in supply of other factors
• George and Martha acquire more land!
• Each worker now produces more wheat because they have more land to work with
• What happens to the Marginal Product of Labor?
Shifts of the Value of the Marginal Product Curve

(a) An Increase in the Price of Wheat

(b) A Decrease in the Price of Wheat

Wage rate

Wage rate

C

A

A

B

Market wage rate

\$200

\$200

MPL

1

MPL

MPL

3

2

MPL

1

0

5

8

0

2

5

Quantity of labor (workers)

Quantity of labor (workers)

3. Changes in technology
• Improved technology can increase or reduce demand for a given factor of production
• How can technological producer reduce factor demand?
Elasticity of Resource Demand
• Measures the extent to which producers change the quantity of a resource they hire when its price changes
• Erd > 1 = resource demand is _________
• Erd < 1 = resource demand is _________
• Erd = 1 = resource demand is _________
Elasticity of Resource Demand
• Sustainability is a fundamental determinant of elasticity
Elasticity of Resource Demand
• Demand for labor is a derived demand, the elasticity of the demand for the output that the labor is producing will influence the elasticity of the demand for labor
• Greater the price elasticity of product demand, the greater the elasticity of resource demand
Optimal Combination of Resources
• What combination of resources a firm will choose when ALL its inputs are variable?
• What combination of resources will minimize costs at a specific level of output?
• Least-cost combination of resources
• The last dollar spend on each resource yields that same MP
Optimal Combination of Resources
• Profit-Maximizing combination of resources is when each resource is employed to the point at which its marginal revenue product equals its resource price
• Labor – ____ = ____
• Capital – ____ = ____