McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

The DemandFor Resources

Chapter 12

Chapter Objectives

• Resource pricing• Marginal revenue productivity

and firm resource demand• Factors that affect resource

demand• Elasticity of resource demand• Optimal combination of

resources for the competitive firm

12-2

Resource Pricing

• Firms demand resources–Focus on labor

• Resource prices are important–Money-income determination–Cost minimization–Resource allocation–Policy issues

12-3

Resource Demand

• All markets are competitive (good and resource)

• Derived demand depends on:–Productivity of resource (MP)–Price of good it helps produce (P)

• Marginal revenue product (MRP)–Change in TR resulting from unit

change in resource (labor)

12-4

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)

Resource Demand

12-5

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)

01234567

07

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$22222222

$ 014263644505456

$141210

8642

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1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Res

ou

rce

Wag

e(W

age

Rat

e)

Quantity of Resource Demanded

D=MRP

PurelyCompetitiveFirm’sDemand forA Resource

12-6

(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

$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

Res

ou

rce

Wag

e(W

age

Rat

e)

Quantity of Resource Demanded

D=MRP(Pure Competition)

ImperfectlyCompetitiveFirm’sDemand forA Resource

D=MRP(ImperfectCompetition)

MRP as Resource Demand

12-7

Resource Demand

• Amount purchased at different resource prices, all else the same–For the firm, equal to MRP

–Market demand equals sum of firm demand

• Downsloping because of DMR–Changes in price for imperfect

competition12-8

Determinants of Resource Demand

• Changes in product demand

• Changes in productivity–Quantities of other resources

–Technological advance

–Quality of variable resource

12-9

• Changes in the price of substitute resources–Substitution effect

–Output effect

–Net effect

• Changes in the price of complementary resources

Determinants of Resource Demand

12-10

Employment Trends

• Rising employment–Services

–Health care

–Computers

• Declining employment–Labor saving technological change

–Textiles

12-11

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

12-12

Optimal Combination of Resources

• All resource inputs are variable

• Choose optimal combination

• Minimize cost of producing a given output

• Maximize profit

12-13

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)=

12-14

Profit Maximizing Rule

• MRP of each resource equals its price

MRPL

PL

MRPC

PC

= = 1

MRPLPL = MRPCPC =and

12-15

Income Distribution

• Paid according to value of service–Workers

–Resource owners

• Inequality–Productive resources unequally

distributed

• Market Imperfections12-16

Case of ATM’s

• Input substitution• Banks use ATMs instead of people• Least-cost combination of resources• ATMs debut about 35 years ago• 11 billion U.S. transactions per year• 80,000 tellers eliminated1990-2000• Former tellers find new jobs• Customer convenience

12-17

Key Terms

• derived demand• marginal product (MP)• marginal revenue product (MRP)• marginal resource cost (MRC)• MRP=MRC rule• substitution effect• output effect• elasticity of resource demand• least-cost combination of resources• profit-maximizing combination of resources• marginal productivity theory of income

distribution12-18

Next Chapter Preview…

WageDetermination

12-19