The Supply and Demand for Productive Resources Two classes of productive resources: Non-human resources: Physical capital Land Natural resources Human resources: (Human capital) Composed of the skills, knowledge, and experience of workers.

HouseholdsBusinesses Goods and Services Markets Resource Markets Resources Payments $$. a. Businesses supply goods & services b. Receive sales revenue. c. Households, (investors, governments, and foreigners) demand goods. a. B usiness firms demand resources b. Households supply labor and other resources c. in exchange for income.

Derived Demand for Resources The demand for resources is derived from the demand for the products that the resources help produce. A service station hires mechanics because of their customers’ demand for repair services.

Demand Inversely Related to Price Substitution in production: If one input becomes more expensive, producers will shift to lower-cost inputs. The better the substitute inputs, the more elastic the demand for the resource. Substitution in consumption: A high resource prices raises the product price and consumers substitute other goods. The more elastic product’s demand, the more elastic is the demand for the resource.

As a resource price increases, producers will: use substitute resources, or face higher costs The Demand for Resources These lead to higher prices and a reduction in consumption. At the lower output, firms use less of the resource that increased in price. Both contribute to the inverse relationship between the price and quantity demanded of a resource. D P2P2 Q1Q1 P1P1 A Q2Q2 Resource price Quantity B

D sr P2P2 Q1Q1 P1P1 B Q2Q2 Resource price Quantity the easier it is to switch to substitute inputs, and/or, the more elastic the demand for the products the resource helps to produce. With time, the demand for a resource becomes more elastic (D sr D lr ): Q3Q3 The long-run demand for a resource is almost always more elastic than demand in the short-run. Time and the Elasticity of Demand for Resources D lr A C

Shifting Resource Demand 1.Changes in product demand - cause the demand for its input resources to change in the same direction. 2.Changes in the productivity of a resource - If productivity rises, the demand rises. 3.Changes in the price of related inputs - The following increase resource demand: an increase in a substitute input price a decrease in a complimentary input price The following decrease resource demand: a decrease in a substitute input price an increase in a complimentary input price

What effect would each of the following tend to have on a firm’s demand for a particular resource, increase (a) or decrease (b) a. An increase in the demand for the firm’s product ___ b. A decrease in the amounts of all other resources the firm employs. ____ c. An increase in the productivity of the resource ____ d. An increase in the price of a substitute resource when the output effect is greater than the substitution effect. _____ e. A decrease in the price of a complementary resource. ___ f. A decrease in the price of a substitute resource when the substitution effect is greater than the output effect. ___ a a a b b b

MRP = Marginal revenue Marginal product * Hiring Resources Hire up to where Marginal Revenue Product = Resource Price Marginal revenue product (MRP): Change in total revenue from the employment of an additional unit of a resource. Marginal product = change in output change in variable input Marginal revenue = change in revenue change in output Remember –

Units of Labor Total Output Marginal Product Product Price Total Revenue MRP 114$5 226$5 337$5 446$5 553$5 658$5 762$5

Units of Labor Total Output Marginal Product Product Price Total Revenue MRP 114 $ $ $ $ $ $ $531020

Total Revenue (5) Marginal Product (3) Output (per week) (2) Variable factor (1) Price (per unit) (4) $1, $1, $2, $2, $3, $3, $3, $ $200 Numbers, Numbers, Numbers MRP (6) change in (2) change in (1) = (2) * (4) = (3) * (4) = A firm sells its product for $200 each (4). The marginal product (3) shows how output changes as workers (units of labor) are hired The marginal revenue product (6) shows how hiring an additional worker affects the firm’s total revenue.

1000 MRP Variable factor Demand for Resources Resource price Quantity The MRP curve is the firm’s short run demand curve for the resource. It slopes downward because the marginal product of the resource falls as more of it is used with a fixed amount of other resources. How will they decide how many to hire?

Choosing Between Resources 1. Maximize Profits – find the output level where profits are maximized. Deal with each resource independently. Hire until: - MRP labor = Price of labor - MRP capital = Price of capital

MP of skilled labor Price of skilled labor = MP of unskilled labor Price of unskilled labor = MP of machine Price ( ) of machine rental value Choosing Between Resources 2. Minimizing the Cost of Production -check the Marginal Productivity per $ -choose the greater up to desired output. If MP labor = 15 and Price = $5, then MP/P = 3 If MP capital = 20 and Price = $5, then MP/P = 4 use capital

Units of Capital MP of Capital Units of Labor MP of Labor a. What is the least-cost combination of labor and capital to employ in producing 80 units of output? ____ C and _____ L b. What is the profit-maximizing combination of capital and labor for the firm to employ? ___ C L Total output: __

Quan.Total Product Marginal Product Total Revenue MRPQuan.Total Product Marginal Product Total Revenue MRP 000$ Labor (price = $8) Capital (price = $12) Minimize cost of 50 units of output Maximize profits

To maximize profits would you: (a) increase Capital (b) increase Labor (c) keep both the same (d) increase both (e) decrease one or both in the following cases: a. MRP L = $8; PL PL = $4; MRP C = $8, PC PC = $4. b. MRP L = $10; PL PL = $12; MRP C = $14, PC PC = $9. c. MRP L = $6; PL PL = MRP C = $12, PC PC = $12. d. MRP L = $22; PL PL = $26; MRP C = $16, PC PC = $19

The short-run supply elasticity is determined by how easily the resource can be transferred from one use to another, or resource mobility. If resources are highly mobile then the supply curve will be elastic even in the short run. The supply of a resource will be more elastic in the long run than the short run. In the long run, investment can increase the supply of both physical and human resources. Supply Positively Related to Price

S P2P2 Q1Q1 P1P1 Q2Q2 B A Resource Supply Resource price Quantity As a resource’s price increases, individuals have a greater incentive to supply it. Thus, a positive relationship will exist between a resource’s price and the quantity supplied in the market.

Time and Resource Supply Elasticity S P 2 Q1Q1 P1P1 Q2Q2 Resource price Quantity The supply of CPA services for example If CPA wages increase from P 1 to P 2, the short-run response will be an increase in CPA services from Q 1 to Q 2. Some CPAs work more and some come out of retirement. At the higher wage P 2, Q 3 CPA services are supplied to the market. The long-run supply of a resource is almost always more elastic than short-run supply. Given time, supply of the resource (CPAs) becomes more elastic. (S sr S lr ) as more individuals choose this field of training. Q3Q3 S lr C A B

SupplyDemand and Resource Prices

Resources Prices Determined by supply and demand. Changes in the market prices influence the decisions of both users and suppliers. Higher resource prices - more substitutes used. Higher resource prices - more of the resource supplied.

Q1Q1 P1P1 D S A Equilibrium Wage (resource price) Quantity market demand is downward sloping, reflecting declining MRP market supply slopes upward as higher prices (wages) induce individuals to supply more. price P 1 brings the choices of buyers and sellers into harmony. At equilibrium price P 1, the quantity demanded will just equal the quantity supplied.

The Coordinating Function of Resource Prices Changes in resource prices in response to changing market conditions are essential for efficient allocation of resources. Profit is a reward for entrepreneurs who are able to see and act on opportunities to put resources to higher valued uses.

leads to an increase in demand for electricians (resource market). Adjusting to Dynamic Change An increase in demand for housing (product market) … In the product market, the equilibrium price and output of houses both rise (to P 2 and Q 2 ). In the resource market, the equilibrium price and output of electrician services will increase substantially (to P 2 and Q 2 ). D2D2 Price Product Market Resource Market P1P1 Q1Q1 D1D1 Q2Q2 P2P2 D2D2 Quantity P1P1 P2P2 S D1D1 S sr Price (wage) Q1Q1 Q2Q2 Quantity

D2D2 Price Product Market Resource Market P1P1 Q1Q1 D1D1 Q2Q2 P2P2 D2D2 Quantity P1P1 P2P2 S D1D1 S sr Price (wage) Q1Q1 Q2Q2 Quantity Adjusting to Dynamic Change S lr P3P3 Q3Q3 This significant increase in price and modest increase in output is a characteristic of the highly inelastic nature of the short-run supply of the skilled electrician’s labor. The higher resource price will attract new human capital investments and, with time, the resource supply curve will become more elastic, moderating the resource price (to P 3 ) and increasing its quantity supplied (to Q 3 ).

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1. The demand curve for a human resource will be more elastic the a.more and better substitutes are available for it. b.more difficult it is to substitute other resources for it. c.more inelastic the demand for the product the resource is used to produce. d.shorter the time period under consideration. 2.If skilled labor is three times the cost of unskilled labor, a profit- maximizing firm will vary the quantity of each type of labor until the a.marginal product of each is the same. b.amount of unskilled labor used is three times the quantity of skilled labor used. c.amount of unskilled labor used is one-third the quantity of skilled labor used. d.marginal product of unskilled labor is one-third that of skilled labor.

3.The notion that the demand for inputs depends on the demand for outputs is termed a.inverse demand.b. derived demand. c.proportional demand.d. complementary demand. 4.What concept implies that a firm’s MRP curve for labor will slope downward in the short run? a.diminishing marginal returnsb. the law of supply c.the law of decreasing costd. the price equalization principle 5.Which one of the following labor resources will likely have the most inelastic supply schedule in the short run? a.filling station attendantsb. sales clerks c.construction laborersd. dentists

6.Suppose the United Auto Workers’ Union succeeded in obtaining a 10 percent increase in the wages of its workers and that the wage increase caused automobile prices to rise. Employment in the auto industry would be most likely to decline significantly if a.the demand for American-made automobiles was highly elastic. b.the supply of foreign-produced automobiles was highly inelastic. c.American consumers considered foreign automobiles a poor substitute for American automobiles. d.the demand for American automobiles was relatively constant and highly inelastic. 7.If the demand for a consumer good decreases, the demand for resources required to make the good will a.increase. b.remain the same, but the quantity demanded will increase. c.decrease. d.increase or decrease depending on whether the demand for the product is elastic or inelastic.

The following chart indicates the reductions in total losses due to theft if a jewelry store hires additional security guards. NumberDollar Value of of Guards Thefts Prevented If the security guards can be hired for $75 per day, how many guards should the shop hire? a.2b. 3 c. 4 d. 5 e. 6

9.An increase in the demand for a product will cause a.both the demand for and prices of the resources used to produce the product to decline. b.both the demand for and prices of the resources used to produce the product to increase. c.the demand for the resources used to produce the product to increase and their prices to decline. d.the demand for the resources used to produce the product to decline and their prices to increase. 10.If the demand for workers with doctorate degrees in economics increases, we would expect a.the wages of economists to increase in the short run and the number of economists employed to increase in the long run. b.the supply of economists to increase in the short run and their wages to rise in the long run. c.a rapid increase in the supply of economists, causing wages to remain constant. d.the wages of economists to decrease in the short run and the number of economists employed to increase in the long run.