12 The Demand for Resources McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Resource Pricing Firms demand resources Focus on labor Resource prices are important Money-income determination Cost minimization Resource allocation Policy issues LO1 12-2

Resource Demand All markets are competitive (good and resource) Derived demand depends on: Productivity of resource (MP) Price of the good it helps produce (P) Marginal revenue product (MRP) Change in TR resulting from unit change in resource (labor) LO1 12-3

Rule for employing resources: MRP = MRC Marginal Revenue Product = Change in Total Revenue Unit Change in Resource Quantity Marginal Resource Cost = Change in Total (Resource) Cost Unit Change in Resource Quantity Marginal Revenue Product (MRP) Marginal Resource Cost (MRC) LO1 Resource Demand 12-4

Resource Wage (Wage Rate) Quantity of Resource Demanded MRP as Resource Demand (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) $2 2 $ $ ] ] ] ] ] ] ] ] ] ] ] ] ] ] $18 D=MRP Purely Competitive Firm’s Demand for A Resource LO1 12-5

$ $ $ ] ] ] ] ] ] ] ] ] ] ] ] ] ] $18 Resource Wage (Wage Rate) Quantity of Resource Demanded D=MRP (Pure Competition) Imperfectly Competitive Firm’s Demand for A Resource D=MRP (Imperfect Competition) MRP as Resource Demand (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) LO1 12-6

Determinants of Resource Demand Changes in product demand Changes in productivity Quantities of other resources Technological advance Quality of the variable resource LO2 12-7

Determinants of Resource Demand Changes in the price of substitute resources Substitution effect Output effect Net effect Changes in the price of complementary resources LO2 12-8

Occupational Employment Trends Rising employment Services Health care Computers Declining employment Labor saving technological change Textiles LO2 12-9

Elasticity of Resource Demand Ease of resource substitutability Elasticity of product demand Ratio of resource cost to total cost E rd = Percentage Change in Resource Quantity Percentage Change in Resource Price LO

Optimal Combination of Resources All resource inputs are variable Choose the optimal combination Minimize cost of producing a given output Maximize profit LO

The Least Cost Rule Minimize cost of producing a given output Last dollar spent on each resource yields the same marginal product Marginal Product Of Labor (MP L ) Price of Labor (P L ) Marginal Product Of Capital (MP C ) Price of Capital (P C ) = LO

Profit Maximizing Rule MRP of each resource equals its price MRP L PLPL MRP C PCPC = = 1 MRP L PLPL = MRP C PCPC = and LO

Income Distribution Paid according to value of service Workers Resource owners Inequality Productive resources unequally distributed Market imperfections LO

Income Distribution Numerical Illustration Data for finding the least-cost and profit-maximizing combination of labor and capital 12-15