Presentation 1 The Demand for Resources

Derived Demand Demand that is derived from the products that the resource helps produce Resources don’t usually go directly to satisfy the consumer---indirectly through their use in goods and services EX- land, tractor, farmer lead to demand for food

Derived Demand The derived nature of resource demand means that the strength of the demand for any resource will depend on: 1. the productivity of the resource in helping to create a good or service 2. the market value or price of the good or service it helps produce

Marginal Revenue Product (MRP) The change in a firm’s total revenue when it employs 1 additional unit of a resource MRP = change in total revenue/change in the quantity of the resource employed

Marginal Resource Cost (MRC) The amount that each additional unit of a resource adds to the firm’s total (resource) cost MRC = change in total (resource) cost/unit change in resource quantity

MRP=MRC Rule To maximize profit a firm should employ the quantity of a resource at which MRP=MRC To maximize profit, a firm should hire any additional units of a specific resource as long as each successive unit adds more to the firm’s TR than it adds to cost TC

Wage Rate In a competitive market, the MRC of labor exactly equals the market wage rate

MRP as Resource Demand MRP as Resource Demand Schedule (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 Resource Wage (Wage Rate) Quantity of Resource Demanded D=MRP Purely Competitive Seller’s Demand for A Resource

MRP as Resource Demand MRP as Resource Demand Schedule (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) $ $ $ ] ] ] ] ] ] ] ] ] ] ] ] ] ] $18 Resource Wage (Wage Rate) Quantity of Resource Demanded D=MRP (Pure Competition) Imperfectly Competitive Seller’s Demand for A Resource D=MRP (Imperfect Competition) W 13.1

Marginal Product (MP) Additional output resulting from using each additional unit of labor Law of diminishing returns applies to marginal product---at some point the MP will decrease

Different Market Structures In the oligopoly, pure monopoly and monopolistic competition, the firms are “price makers” The firm’s product demand curve is downsloping because the firm must set a lower price to increase sales A competitive firm is downsloping due to diminishing marginal returns

Shifts in the Curve Ex- an increase in the demand for new houses will drive up housing prices. Those higher prices will increase the MRP of construction workers and the demand for construction workers will rise (shift to the right)

Changes in Productivity Other things equal, an increase in the productivity of a resource will increase the demand for the resource and a decrease in productivity will reduce the resource demand

Substitution Effect A firm will purchase more of an input whose relative price has declined and, conversely, use less of an input whose relative price has increased Ex- If the price of natural gas goes down, firms will use more natural gas and less petroleum or electricity

Output Effect The situation where an increase in the price of one input will increase the firm’s production cost and reduce its level of output, thus reducing its demand for other inputs and vice versa