CH. 27 : THE DEMAND FOR RESOURCES

I. Resource Pricing A. Here we analyze input costs to the business

(ie. Cost of labor, machines) B. Ch. 23-25 determined how output or product

should be made. Here, its how many workers should we hire to make the output (or machines).

C. Assume P.C. Industry in this chapterII. Rules on how many workers/resources to hire A. Marginal Revenue Product = the increase in

TR from adding one more variable input(worker)

1. MRP = Change in TR

Change in resource Q

B. Marginal Resource Cost = the change

in costs from adding another worker

1.

C. Rule = Firm will maximize profits up to

the point where MRP = MRC (same as

saying MR = MC)

1. Remember, in P.C. MRP = D line =

Price. If Qs talk about prices

changing, it must be M.C., O, or M

D. Derived Demand = D for worker goes

in same direction as demand for

product

III. Man vs. Machine

A. Price changes of Substitute and

Complementary resources will affect the

demand for the resource by….

1. Substitute Resources = Ex. If price of machine

goes down, the demand of machines increase

and the demand for humans decrease

2. Complementary Resources = Ex. If price of

machine decreases, demand for machine and

complementary human running the machine

increase.

IV. Elasticity of Resource Demand

A.Measures sensitivity/reaction by employers to a change in resource price

1. Ex. If wages increase, will producers

hire a lot less workers or a little

less?

V. Optimal Combo of resources (how many workers and machines?) A. Least Cost Rule = Costs are minimized when …. 1. Rule = MP of Labor = MP of Capital P of Labor P of Capital

B. What combo of Resources will maximize Revenue? When…. 1. Rule = MRP of Labor = MRP of Capital P of Labor P of Capital