In this chapter, students will be able to understand: Explain the significance of resource pricing, convey how the marginal revenue productivity of a resource relates to a firm''s demand for that resource, list the factors that increase or decrease resource demand, discuss the determinants of elasticity of resource demand, determine how a competitive firm selects its optimal combination of resources.
12 TheDemandforResources McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved ResourcePricing Firms demand resources Focus on labor • Resource prices are important • Money-income determination • Cost minimization • Resource allocation • Policy issues LO1 12-2 Resource Demand • All markets are competitive (good and resource) • Derived demand depends on: • Productivity of resource (MP) • Price of the good it helps produce (P) • Marginal revenue product (MRP) • Change in TR resulting from unit change in resource (labor) LO1 12-3 Resource Demand •Rule for employing resources: • MRP = MRC • Marginal Revenue Product (MRP) Marginal Revenue Product = Change in Total Revenue Unit Change in Resource Quantity • Marginal Resource Cost (MRC) Marginal Resource Cost LO1 = Change in Total (Resource) Cost Unit Change in Resource Quantity 12-4 MRP as Resource Demand (1) (2) (3) Units of Total Product Marginal Resource (Output) Product (MP) 0] 7] 13 ] 18 ] 22 ] 25 ] 27 ] 28 (4) Product Price (5) Total Revenue, (2) X (4) $2 2 2 2 $0 14 26 36 44 50 54 56 ] ] ] ] ] ] ] (6) Marginal Revenue Product (MRP) $14 12 10 $18 Resource Wage (Wage Rate) Purely Competitive Firm’s Demand for A Resource 16 14 12 10 D=MRP -2 Quantity of Resource Demanded LO1 12-5 MRP as Resource Demand (1) (2) (3) Units of Total Product Marginal Resource (Output) Product (MP) 0] 7] 13 ] 18 ] 22 ] 25 ] 27 ] 28 (4) Product Price (5) Total Revenue, (2) X (4) $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 ] ] ] ] ] ] ] (6) Marginal Revenue Product (MRP) $18.20 13.00 8.40 4.40 2.25 1.00 -1.05 $18 Resource Wage (Wage Rate) Imperfectly Competitive Firm’s Demand for A Resource 16 14 10 -2 LO1 D=MRP (Pure Competition) 12 D=MRP (Imperfect Competition) Quantity of Resource Demanded 12-6 Determinants of Resource Demand • Changes in product demand • Changes in productivity • Quantities of other resources • Technological advance • Quality of the variable resource LO2 12-7 Determinants of Resource Demand • Changes in the price of substitute • LO2 resources • Substitution effect • Output effect • Net effect Changes in the price of complementary resources 12-8 Occupational Employment Trends • Rising employment • Services • Health care • Computers • Declining employment • Labor saving technological change • Textiles LO2 12-9 Elasticity of Resource Demand Erd = Percentage Change in Resource Quantity Percentage Change in Resource Price • Ease of resource substitutability • Elasticity of product demand • Ratio of resource cost to total cost LO2 12-10 Optimal Combination of Resources • All resource inputs are variable • Choose the optimal combination • Minimize cost of producing a given output • Maximize profit LO3 12-11 The Least Cost Rule • Minimize cost of producing a given • output Last dollar spent on each resource yields the same marginal product Marginal Product Of Labor (MPL) Price of Labor (PL) LO3 = Marginal Product Of Capital (MPC) Price of Capital (PC) 12-12 Profit Maximizing Rule • MRP of each resource equals its price PL = MRPL and PC = MRPC MRPL PL LO3 = MRPC PC =1 12-13 Income Distribution • Paid according to value of service • Workers • Resource owners • Inequality • Productive resources unequally • LO3 distributed Market imperfections 12-14 Income Distribution • Numerical Illustration • Data for finding the least-cost and profit-maximizing combination of labor and capital 12-15 ... 1 2-6 Determinants of Resource Demand • Changes in product demand • Changes in productivity • Quantities of other resources • Technological advance • Quality of the variable resource LO2 1 2-7 ... Resource Wage (Wage Rate) Purely Competitive Firm’s Demand for A Resource 16 14 12 10 D=MRP -2 Quantity of Resource Demanded LO1 1 2-5 MRP as Resource Demand (1) (2) (3) Units of Total Product Marginal... Determinants of Resource Demand • Changes in the price of substitute • LO2 resources • Substitution effect • Output effect • Net effect Changes in the price of complementary resources 1 2-8 Occupational Employment Trends