Resource Markets LandLaborCapital Entrepreneurship

√ A resource market involves businesses and the resources they need to purchase to produce goods and services. √ Businesses are the demanders of the resources. √ Businesses are the demanders of the resources. √ In the consumer flow diagram, the resources owned by households are exchanged with businesses for income. Resource Money Payments Resource or factor Market Product Market Land, Labor, Capital and Entrepreneurship Goods and Services Money Payments Households Businesses √ Households are the suppliers of the resources.

Product Market Perfect competition Monopolistic competition OligopolyMonopoly Product Market Perfect competition Monopolistic competition OligopolyMonopolyFirmFirm As a producer of outputs Factor Market Perfect competition Some degree of monopsony Factor Market Perfect competition Some degree of monopsony As a hirer of inputs As a hirer of inputs The firm is in the middle of two markets Supplier of goods and services in the product market Supplier of goods and services in the product market Demander of resources in the factor or resource market Demander of resources in the factor or resource market

SupplierProduct Firm selling T-shirts DemanderResource Firm hiring workers DemanderResource Business paying to rent a factory DemanderProduct Customer buying a hamburger SupplierResource Cashier at work RoleMarketActivity

√ Money Income determination: resources are major source √ Resource Allocation: prices allocate scarce resources √ Cost Minimization: best combination of resources will be most efficient √ Ethical questions and Policy Issues: the unequal distribution of income, minimum wage laws, etc. Why Study Resource pricing?

What determines the Demand for Resources? Derived Demand … demand for resources is derived from the products which those resources help produce.

Factor demand is the demand for the use of the productive services of resources, or factors of production√ Factor demand is a derived demand. Factor demand is the demand for the use of the productive services of resources, or factors of production√ Factor demand is a derived demand. Derived demand is the demand for the services of a resource or factor of production resulting from the demand for the good or service produced. Derived demand is the demand for the services of a resource or factor of production resulting from the demand for the good or service produced. The demand for a factor of production is derived from the demand for the product.

A study announces increased cancer risk from drinking coffee Wage rates fall Influence on price/wage Price of coffee falls Influence on price Demand decreases Affects Demand or Supply Demand decreases Affects Demand or Supply Workers in coffee shops Other market Coffee Primary Market

1.productivity of resource 2. market value or price of good produced Demand for resource depends on:

What is Marginal Physical Product? MPP is the change in output that results from adding one more unit of resource, such as labor, to production.

11 MPP = QUANTITY LABOR INPUTS Let’s use the simple form of MMP—MP, the marginal product!

What is Marginal Revenue Product? MRP is the change in total revenue that results from adding one more unit of a resource, such as labor, to production.

13 MRP = MP x P Marginal Revenue Product equals the Marginal Product times the Price.

14 MRP = Total Revenue Labor √ The MRP curve is the resource demand curve. √ Location of curve depends on the productivity and the price of the product.

Calculation of MRP LaborOutputMPPTRMRP 00$20 177$2$14$ $2$26$ $2$36$ $2$44$8 5253$2$50$6 6272$2$54$4 7281$2$56$2 X =

Units of ResourceTotalProduct(Output)MarginalProduct(MP)ProductPriceTotalRevenueMarginalRevenue Product (MRP) Q P Resource price (wage rate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] ] ] ] ] ] ] 0 0$2$ 0 Consider the case of resource demand under Pure Competition

Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] Q P Resource price (wage rate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] $2 2 $ 0 14 $ 14

Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] Q P Resource price (wage rate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] $2 2 $ $ 14 12

Units of Resource TotalProduct(Output)MarginalProduct(MP) ProductPriceTotalRevenue MarginalRevenue Product (MRP) ] ] ] ] ] ] Q P Resource price (wage rate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] $2 2 $ $

Units of Resource TotalProduct(Output)MarginalProduct(MP) ProductPriceTotalRevenue MarginalRevenue Product (MRP) ] ] ] ] ] ] Q P Resource price (wage rate) Quantity of resource demanded ] ] ] ] ] ] $2 2 $ $ The purely competitive seller’s demand for a resource Pure Competition MRP AS A DEMAND SCHEDULE

Units of Resource TotalProduct(Output)MarginalProduct(MP) ProductPriceTotalRevenue MarginalRevenue Product (MRP) ] ] ] ] ] ] Q P Resource price (wage rate) Quantity of resource demanded ] ] ] ] ] ] $2 2 $ $ The purely competitive seller’s demand for a resource Imperfect Competition MRP AS A DEMAND SCHEDULE Consider the case of resource demand under Imperfect Competition

Units of Resource TotalProduct(Output)MarginalProduct(MP) ProductPriceTotalRevenue MarginalRevenue Product (MRP) ] ] ] ] ] ] Q P Resource price (wage rate) Quantity of resource demanded ] ] ] ] ] ] $ $ $ The imperfectly Competitive seller’s demand for a resource Imperfect Competition MRP AS A DEMAND SCHEDULE

DETERMINANTS OF RESOURCE DEMAND DETERMINANTS OF RESOURCE DEMAND √ Changes in Product Demand Derived Demand √ Changes in Productivity Quantities of Other Resources Technological Advance Quality of the Variable Resource

DETERMINANTS OF RESOURCE DEMAND Changes in the Prices of Other Resources √ Substitute Resource Substitution Effect Output Effect Net Effect √ Complementary Resources

An increase in the skill level of glassblowers increases the demand for their services. Computer-assisted graphic design increases the productivity of and the demand for graphic artists. Gambling increases in popularity, increasing the demand for workers at casinos Consumers decrease their demand for leather coats, decreasing the demand for tanners Examples Change in productivity Change in product demand Determinant Examples of Determinants of Labor Demand

ExamplesDeterminant An increase in the price of electricity increases the cost of producing aluminum and reduces the demand for its workers. The price of security equipment used by businesses to protect against illegal entry falls, decreasing the demand for night guards The price of telephone switching equipment decreases, greatly reducing the cost of telephone service, which in turn increases the demand for telemarketers. Changes in the price of another resource Examples of Determinants of Labor Demand

ELASTICITY OF RESOURCE DEMAND ELASTICITY OF RESOURCE DEMAND E rd = Percentage change in resource price Percentage change in resource quantity E rd > 1 is Elastic E rd = 1 is Unit-Elastic E rd < 1 is Inelastic E rd = % in resource Q % in resource P % in resource P

Elasticity of Resource Demand Characteristics Rate of MP decline: √ highly elastic; a small decline in the price of a resource will yield a relatively large increase in the amount of labor demanded. √ inelastic; a relatively large decline in the wage rate will be accompanied by a very modest increase in the amount of labor hired.

Ease of Resource Substitutability √ the larger the number of good substitute resources available, the greater the elasticity of demand for a particular resource √ wood substitutes and aluminum √ Time element: airline pilots airline pilots railroad crews railroad crews truck drivers truck drivers Elasticity of Resource Demand Characteristics

Elasticity of Product Demand √ the greater the elasticity of product demand, the greater the elasticity of resource demand; derived demand is reason √ recall the elasticity of demand curves for resources by perfect and imperfect competitors Labor Cost-Total Cost Ratio √ the larger the proportion of total production cost accounted for by a resource, the greater will be the elasticity of demand for that resource. Elasticity of Resource Demand Characteristics

Optimum Combination Of Resources MP of Labor MP of Capital Price of Labor Price of Capital Least-Cost Combination of Resources MP L PLPL MP C PCPC ==

Profit-Maximizing Combination MRP L PLPL MRP C PCPC 1 Optimum Combination Of Resources

For 50 units of output Example: For 50 units of output MP L = MP C P L P C 3 labor 6/$8 2 capital 9/$12 Least-Cost Rule:

Profit-Maximizing Rule MRP L = MRP C = 1 P L P C 5 labor 8/8 3 capital 12/12 3 capital 12/12 √ How many units? 5 labor produce— 37 3 capital produce—28 = 65 units of output

√ Can a firm be least cost and profit maximizing? Least cost Profit maximizing 5 labor 4/88/8 3 capital 6/1212/12 65 units

Optimum Combination Of Resources Least-Cost Combination of Resources MP L PLPL MP C PCPC == Profit-Maximizing Combination MRP L PLPL MRP C PCPC 1

What is least cost rule for producing 80 units? What is the profit maximizing combination?