1 Chapter 12 The Supply of and Demand for Productive Resources

2 Overview The demand for productive resources The demand for productive resources The supply of productive resources The supply of productive resources Equilibrium in the resource market Equilibrium in the resource market Marginal Revenue Product (MRP) Marginal Revenue Product (MRP) Value Marginal Product (VMP) Value Marginal Product (VMP) Profit maximization and cost minimization when multiple resources are used Profit maximization and cost minimization when multiple resources are used

3 Demand for Resources The demand for resources is downward sloping. As price increases: 1. Producers will turn to substitute goods 2. Consumers will buy less of the products that the resource makes

4 Elasticity of Resource Demand Resource demand will be more elastic: 1. The more substitutes the resource has 2. The greater the elasticity of the product that the resource makes 3. In the Long Run

5 Supply of Resources The supply of resources is upward sloping because: As the price of a specific resource increases, the incentive of potential suppliers to provide the resource increases

6 Equilibrium! The price and quantity of resources will move toward the market equilibrium.

7 Shifters of Resource Demand 1. A shift in the demand for a product will cause a shift in the demand for the resources used to make that product

8 Shifters of Resource Demand 2. Changes in the productivity of a resource

9 Shifters of Resource Demand 3. Changes in the price of a related resource. A. Substitutes B. Compliments

10 Marginal Revenue Product (MRP) The change in total revenue of a firm that results from the employment of one additional unit of a resource. MRP = Marginal Revenue x Marginal Product

11 Value Marginal Product (VMP) The marginal product of a resource multiplied by the selling price of the product it helps produce VMP = Price x Marginal Product

12 Price Takers vs. Price Searchers For Price Takers: VMP = MRP For Price Searchers: VMP > MRP

13 Cost Minimization Factors of production will be employed such that the marginal product per last dollar spent on each factor is the same for all factors

14 Review 1. Understand the demand side of the resource market 2. Understand the supply side of the resource market 3. Understand the market equilibrium 4. Know what MRP and VMP is and how they relate to price takers and price searchers 5. Understand the concept of cost minimization