12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc....

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12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Transcript of 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc....

Page 1: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

12

The Demand for Resources

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Resource Pricing

• Firms demand resources

• Focus on labor

• Resource prices are important

• Money-income determination

• Cost minimization

• Resource allocation

• Policy issues

LO1 12-2

Page 3: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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

Page 4: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

•Rule for employing resources:

• MRP = MRC

MarginalRevenueProduct

=Change in Total Revenue

Unit Change in Resource Quantity

MarginalResource

Cost=

Change in Total (Resource) Cost

Unit Change in Resource Quantity

• Marginal Revenue Product (MRP)

• Marginal Resource Cost (MRC)

LO1

Resource Demand

12-4

Page 5: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Re

so

urc

e W

ag

e(W

ag

e R

ate

)

Quantity of Resource Demanded

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)

01234567

07

131822252728

7654321

$22222222

$ 014263644505456

$141210

8642

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1 2 3 4 5 6 7

0

-2

2

4

6

8

10

12

14

16

$18

D=MRP

PurelyCompetitiveFirm’sDemand forA Resource

LO1 12-5

Page 6: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

01234567

07

131822252728

7654321

$2.802.602.402.202.001.871.751.65

$ 0.0018.2031.2039.6044.0046.2547.2546.20

$18.2013.008.404.402.251.00

-1.05

]]]]]]]

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1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Re

so

urc

e W

ag

e(W

ag

e R

ate

)

Quantity of Resource Demanded

D=MRP(Pure Competition)

ImperfectlyCompetitiveFirm’sDemand forA Resource

D=MRP(ImperfectCompetition)

MRP as Resource Demand(1)

Units ofResource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

LO1 12-6

Page 7: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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

Page 8: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Determinants of Resource Demand

• Changes in the price of substitute resources

• Substitution effect

• Output effect

• Net effect

• Changes in the price of complementary resources

LO2 12-8

Page 9: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Occupational Employment Trends

• Rising employment

• Services

• Health care

• Computers

• Declining employment

• Labor saving technological change

• Textiles

LO2 12-9

Page 10: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Elasticity of Resource Demand

• Ease of resource substitutability

• Elasticity of product demand

• Ratio of resource cost to total cost

Erd =Percentage Change in Resource Quantity

Percentage Change in Resource Price

LO2 12-10

Page 11: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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

Page 12: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

The Least Cost Rule

• Minimize cost of producing a given output

• Last dollar spent on each resource yields the same marginal product

Marginal ProductOf Labor (MPL)

Price of Labor (PL)

Marginal ProductOf Capital (MPC)

Price of Capital (PC)=

LO3 12-12

Page 13: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Profit Maximizing Rule

• MRP of each resource equals its price

MRPL

PL

MRPC

PC

= = 1

MRPLPL = MRPCPC =and

LO3 12-13

Page 14: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Income Distribution

• Paid according to value of service

• Workers

• Resource owners

• Inequality

• Productive resources unequally distributed

• Market imperfections

LO3 12-14

Page 15: 12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Income Distribution

•Numerical Illustration

•Data for finding the least-cost and profit-maximizing combination of labor and capital

12-15


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