Chapter 14 The Demand for Resources Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

14-2 Significance of Resource Pricing Determines money income for the household Cost minimization Resource allocation Policy issues LO1

14-3 Marginal Productivity Theory of Resource Demand Assume perfectly competition Product markets Resource markets Derived demand for resources depends on Marginal product of the resource (MP) Price of the product it produces (P) LO2

14-4 Marginal Productivity Theory of Resource Demand Marginal revenue product (MRP) Change in total revenue resulting from unit change in resource input (labor) Marginal revenue product = change in total revenue change in resource quantity LO2

14-5 Marginal Productivity Theory of Resource Demand Marginal resource cost (MRC) Change in total resource cost resulting from unit change in resource input (labor) Marginal resource cost = change in total cost change in resource quantity LO2

14-6 Marginal Productivity Theory of Resource Demand MRP = MRC rule To maximize profit, hire additional resources as long as the additional product produced adds more to revenues than to costs MRP schedule equals the firm’s demand for labor MRC exactly equal to wage rate LO2

14-7 MRP as Resource Demand Resource wage (wage rate) Quantity of resource demanded (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 LO2

14-8 Imperfectly competitive firm’s demand for a resource MRP as Resource Demand $ $ $ ] ] ] ] ] ] ] ] ] ] ] ] ] ] $18 Resource wage (wage rate) Quantity of resource demanded D=MRP (Pure competition) D=MRP (Imperfect competition ) (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) LO2

14-9 Determinants of Resource Demand Changes in product demand Changes in productivity Quantities of other resources Technological advance Quality of the variable resource LO3

14-10 Determinants of Resource Demand Changes in price of substitute resources Substitution effect Output effect Net effect Changes in the price of complementary resources LO3

14-11 Substitute and Complement Resources The Effect of an Increase in the Price of Capital on the Demand for Labor (2) Increase in the Price of Capital (1) Relationship of Inputs (a) Substitution Effect (b) Output Effect (c) Combined Effect Substitutes in production Labor substituted for capital Production costs up, output down, and less of both capital and labor used D L increases if the substitution effect exceeds the output effect; D L decreases if the output effect exceeds the substitution effect Complements in production No substitution of labor for capital Production costs up, output down, and less of both capital and labor used D L decreases (because only the output effect applies) LO3

14-12 Determinants of Resource Demand DeterminantExamples Change in product demand Gambling increases in popularity, increasing the demand for workers at casinos. Consumers decrease their demand for leather coats, decreasing the demand for tanners. The Federal government increases spending on homeland security, increasing the demand for security personnel. Change in productivityAn increase in the skill levels of physicians increases the demand for their services. Computer-assisted graphic design increases the productivity of, and the demand for, graphic artists. Change in the price of another resource An increase in the price of electricity increases the cost of producing aluminum and reduces the demand for aluminum workers. The price of security equipment used by businesses to protect against illegal entry falls, decreasing the demand for night guards. The price of cell phone equipment decreases, reducing the cost of cell phone service; this in turn increases the demand for cell phone assemblers. Health-insurance premiums rise, and firms substitute part-time workers who are not covered by insurance for full-time workers who are. LO3

14-13 Occupational Employment Trends Rising employment in health services Personal care aides Home health aides Biomedical engineers Declining employment Shoe machine operators Postal service mail sorters Postal service clerks LO3

14-14 Employment Trends The 10 Fastest Growing U.S. Occupations in Percentage Terms Employment, Thousands of Jobs Occupation Percentage Increase Personal care aides8611, Home health aides1,0181, Biomedical engineers Masonry helpers Carpentry helpers Veterinary technologists and technicians Iron and rebar workers Physical therapist assistants Piping and plumbing helpers Meeting, convention, and event planners LO3

14-15 Employment Trends The 10 Most Rapidly Declining U.S. Occupations in Percentage Terms Employment, Thousands of Jobs Occupation Percentage Increase Shoe machine operators Postal service mail sorters Postal service clerks Fabric/apparel pattern makers Postmasters/mail superintendents Sewing machine operators Switchboard operators Textile cutting machine operators Textile knitting/weaving machine operators Semiconductor processors LO3

14-16 Elasticity of Resource Demand 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 LO4

14-17 Optimal Combination of Resources What combination of resources will minimize costs at a specific output level? Least–cost combination of resources Least cost rule What combination of resources will maximize profit? Profit-maximizing combination of resources Profit maximizing rule LO5

14-18 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 ) = LO5

14-19 Profit Maximizing Rule Each resource is employed to the point where its MRP is equal to its price MRP L PLPL MRP C PCPC = = 1 MRP L PLPL =MRP C PCPC = and LO5

14-20 Numerical Example Data for finding the least-cost and profit- maximizing combination of labor and capital LO5 (1) Quantity (2) Total Product (Output) (3) Marginal Product (4) Total Revenue (5) Marginal Revenue Product $ $ ] ] ] ] ] ] ] ] ] ] ] ] ] ] (1′) Quantity (2′) Total Product (Output) (3′) Marginal Product (4′) Total Revenue (5′) Marginal Revenue Product ] ] ] ] ] ] ] $ ] ] ] ] ] ] ] $ Labor (Price = $8)Capital (Price = $12)

14-21 Income Distribution Marginal productivity theory of income distribution Paid according to value of service Workers Resource owners Inequality Productive resources unequally distributed Market imperfections LO6

14-22 Input Substitution: The Case of ATMS Banks use ATMS instead of human tellers Least cost combination of resources ATMS debuted about 45 years ago 80 billion US transactions per year Former tellers find new jobs Customer convenience