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Chapter 16

Chapter 16. The Demand for Resources. Significance of Resource Pricing. Determines money income for the household Cost minimization Resource allocation Policy issues. LO1. Derived Demand for Resources. Assume perfect competition Product markets Resource markets

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Chapter 16

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  1. Chapter 16 The Demand for Resources

  2. Significance of Resource Pricing • Determines money income for the household • Cost minimization • Resource allocation • Policy issues LO1

  3. Derived Demand for Resources • Assume perfect competition • Product markets • Resource markets • Derived demand for resources depends on • Marginal product of the resource (MP) • Price of the product it produces (P) LO2

  4. Marginal Revenue Product • Marginal revenue product (MRP) • Change in total revenue resulting from unit change in resource input (labor) Marginal revenue product change in total revenue = change in resource quantity LO2

  5. Marginal Resource Cost • Marginal resource cost (MRC) • Change in total resource cost resulting from unit change in resource input (labor) Marginal resource cost change in total cost = change in resource quantity LO2

  6. Marginal Productivity Theory of Resource Demand • MRP = MRC rule • To maximize profit, hire additional resources as long as the additional product produced adds more to revenues than to costs • MRP schedule equals the firm’s demand for labor • MRC exactly equal to wage rate LO2

  7. (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price (5) Total Revenue, (2) × (4) (6) Marginal Revenue Product (MRP) $ 0 14 26 36 44 50 54 56 $14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 $2 2 2 2 2 2 2 2 7 6 5 4 3 2 1 ] ] ] ] ] ] ] ] ] ] ] ] ] ] $18 16 14 12 10 8 6 D=MRP 4 2 0 1 2 3 4 5 6 7 -2 MRP as Resource Demand Purely competitive firm’s demand for labor Resource wage (wage rate) Quantity of resource demanded LO2

  8. (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price (5) Total Revenue, (2) × (4) (6) Marginal Revenue Product (MRP) 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 1.85 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 ] ] ] ] ] ] ] ] ] ] ] ] ] ] $18 16 D=MRP (Pure competition) 14 12 10 8 D=MRP (Imperfect competition) 6 4 2 0 1 2 3 4 5 6 7 -2 Resource Demand under Imperfect Competition Imperfectly competitive firm’s demand for labor Resource wage (wage rate) Quantity of resource demanded LO2

  9. Determinants of Resource Demand • Changes in product demand • Changes in productivity • Quantities of other resources • Technological advance • Quality of the variable resource LO3

  10. Determinants of Resource Demand Continued • Changes in price of substitute resources • Substitution effect • Output effect • Net effect • Changes in the price of complementary resources LO3

  11. Substitute and Complement Resources LO3

  12. Determinants of Labor Demand LO3

  13. Occupational Employment Trends • Rising employment in health services • Personal care aides • Home health aides • Biomedical engineers • Declining employment • Shoe machine operators • Postal service mail sorters • Postal service clerks LO3

  14. Growing Employment Trends LO3

  15. Declining Employment Trends LO3

  16. Elasticity of Resource Demand • Elasticity of resource demand • Ease of resource substitutability • Elasticity of product demand • Ratio of resource cost to total cost percentage change in resource quantity Erd = percentage change in resource price LO4

  17. Optimal Combination of Resources • What combination of resources will minimize costs at a specific output level? • Least-cost combination of resources • Least cost rule • What combination of resources will maximize profit? • Profit-maximizing combination of resources • Profit maximizing rule LO5

  18. 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) Marginal product of capital (MPC) = Price of capital (PC) Price of labor (PL) LO5

  19. MRPL MRPC = 1 = PL PC Profit-Maximizing Rule • Each resource is employed to the point where its MRP is equal to its price PL = MRPL PC = MRPC and LO5

  20. ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Numerical Illustration Find the least-cost, profit-maximizing combination of labor and capital Labor (Price = $8) Capital (Price = $12) (2) Total Product (Output) (5) Marginal Revenue Product (2′) Total Product (Output) (5′) Marginal Revenue Product (3′) Marginal Product (4′) Total Revenue (3) Marginal Product (4) Total Revenue (1) Quantity (1′) Quantity 0 13 22 28 32 35 37 38 0 1 2 3 4 5 6 7 0 12 22 28 33 37 40 42 $ 0 24 44 56 66 74 80 84 0 1 2 3 4 5 6 7 $ 0 26 44 56 64 70 74 76 $24 20 12 10 8 6 4 13 9 6 4 3 2 1 12 10 6 5 4 3 2 $26 18 12 8 6 4 2 LO5

  21. Income Distribution • Marginal productivity theory of income distribution • Paid according to value of service • Workers • Resource owners • Inequality • Productive resources unequally distributed • Market imperfections LO6

  22. Substitutes or Complements? • Banks will use the least cost combination of resources • Before ATMs, tellers would handle cash for customers (labor) • ATMs arrived in 1980s and they can handle cash for customers (capital) • At first, tellers were displaced but today there are more ATMs and more tellers • Labor and capital are now complements

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