The Demand for Resources 27 C H A P T E R The Demand for Resources

Money Income Determination Resource Allocation Cost Minimization SIGNIFICANCE OF RESOURCE PRICING Money Income Determination Resource Allocation Cost Minimization Ethical Questions and Policy Issues

MARGINAL PRODUCTIVITY THEORY OF RESOURCE DEMAND Resource Demand as a Derived Demand Marginal Revenue Product (MRP) Productivity Marginal Product (MP) Product Price Marginal Revenue Product = Change in Total Revenue Unit change in Resource Quantity

MARGINAL PRODUCTIVITY THEORY OF RESOURCE DEMAND Revenue Cost = Change in Total (Resource) Cost Unit change in Resource Quantity Rule for Employing Resources: MRP = MRC

GLOBAL PERSPECTIVE Labor Demand and Allocation: Selected Nations Percentage of Labor Force 0 25 50 75 100 Agriculture Developing Countries Industry Services Industrially Advanced Countries United States Source: International Labour Organization

MRP AS A DEMAND SCHEDULE Pure Competition Units of Resource Total Product (Output) Marginal product (MP) Price Revenue Product (MRP) ] $2 $ 0 ] Consider the case of resource demand under Pure Competition 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resource price (wage rate) Quantity of resource demanded

MRP AS A DEMAND SCHEDULE Pure Competition Total Product (Output) Marginal product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 1 7 ] $2 2 $ 0 14 ] 7 $ 14 ] ] ] ] ] ] ] ] ] ] P 14 12 10 8 6 4 2 Resource price (wage rate) Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

MRP AS A DEMAND SCHEDULE Pure Competition Total Product (Output) Marginal product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 1 2 7 13 ] $2 2 $ 0 14 26 ] 7 6 $ 14 12 ] ] ] ] ] ] ] ] ] ] P 14 12 10 8 6 4 2 Resource price (wage rate) Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

MRP AS A DEMAND SCHEDULE Pure Competition Total Product (Output) Marginal product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 1 2 3 7 13 18 ] $2 2 $ 0 14 26 36 ] 7 6 5 $ 14 12 10 ] ] ] ] ] ] ] ] ] ] P 14 12 10 8 6 4 2 Resource price (wage rate) Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

MRP AS A DEMAND SCHEDULE Pure Competition Total Product (Output) Marginal product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 1 2 3 4 5 6 7 7 13 18 22 25 27 28 ] $2 2 $ 0 14 26 36 44 50 54 56 ] 7 6 5 4 3 2 1 $ 14 12 10 8 6 4 2 ] ] ] ] ] ] ] ] ] ] P 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource Resource price (wage rate) Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

MRP AS A DEMAND SCHEDULE Pure Competition Total Product (Output) Marginal product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 1 2 3 4 5 6 7 7 13 18 22 25 27 28 ] $2 2 $ 0 14 26 36 44 50 54 56 ] 7 6 5 4 3 2 1 $ 14 12 10 8 6 4 2 Now, consider the case of resource demand under Imperfect Competition ] ] ] ] ] ] ] ] ] ] P 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource Resource price (wage rate) Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

MRP AS A DEMAND SCHEDULE Imperfect Competition Total Product (Output) Marginal product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 1 2 3 4 5 6 7 7 13 18 22 25 27 28 ] $2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65 $ 0 18.20 31.20 39.60 44.00 46.25 47.25 46.20 ] 7 6 5 4 3 2 1 $ 18.20 13.00 8.40 4.40 2.25 1.00 -1.05 ] ] ] ] ] ] ] ] ] ] P 14 12 10 8 6 4 2 The imperfectly Competitive seller’s demand for a resource Resource price (wage rate) Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

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

Changes in the Prices of Other Resources Substitute Resources DETERMINANTS OF RESOURCE DEMAND Changes in the Prices of Other Resources Substitute Resources Substitution Effect Output Effect Net Effect Complementary Resources Occupational Employment Trends

Erd = Rate of MP Decline Ease of Resource Substitutability ELASTICITY OF RESOURCE DEMAND Erd = Percentage change in resource price Percentage change in resource quantity Rate of MP Decline Ease of Resource Substitutability Elasticity of Product Demand Ratio of Resource Cost to Total Cost Ratio

1 OPTIMUM COMBINATION OF RESOURCES MRPL MRPC PL PC Least-Cost Rule Least-Cost Combination of Resources MP of Labor MP of Capital Price of Labor Price of Capital Profit-Maximizing Combination MRPL PL MRPC PC 1

MARGINAL PRODUCTIVITY THEORY OF INCOME DISTRIBUTION Inequality Market Imperfections Chapter Conclusions

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 distribution Copyright McGraw-Hill/Irwin 2002 BACK END

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