Economic Concepts

Ch 12-Demand For Resources Derived Demand-from the products that resources produce. Marginal Revenue Product(MRP)-change in tl revenue resulting from the use of each additional unit of resource. MRP=MRC –WHY? Profit seeking rule

Profit Seeking Rule To maximize profits a firm should hire additional units of a resource as long as each successive unit adds more to firm’s total revenue than to total cost.

MRP=MRC MRP measures how much each successive unit of resource adds to revenue MRC measures each additional unit of resource adds to resource cost. MRP=MRC is similar to MR=MC; same profit maximization rule MRP=MRC deals with inputs MR=MC deals with outputs

(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 Firm’s Demand for A Resource D=MRP (Imperfect Competition) 12-5

Demand Curve Imperfectly Competitive Seller Demand Curve –Slopes Downward –Marginal Product & Product Price fall as resource employment and output rise. Pure Competition Seller Demand Curve –Downward slope is greater than imperfect –Pure competitor can sell added output at a constant price.

Ch 13 Wage Determination Purely competitive labor market –Numerous firms compete for labor –Qualified workers w/ identical skills supply labor –Firms and individual workers are “wage takers”

Role of Productivity Labor demand depends on productivity U.S. labor highly productive –Plentiful capital –Access to abundant natural resources –Advanced technology –Labor quality –Other factors

Competitive Labor Market Market demand for labor –Sum of firm demand –Example: carpenters Market supply for labor –Upward sloping –Competition among industries Labor market equilibrium –MRP = MRC rule

Wage Rate (Dollars) ($10) W C ($10) W C Labor MarketIndividual Firm Quantity of Labor QCQC (1000) 00 D=MRP (∑ mrp’s) d=mrp qCqC (5) s=MRC S e c b a Competitive Labor Market 13-10

Monopsony Employer has buying power Characteristics –Single buyer –Labor immobile –Firm “wage maker” Firm labor supply upward sloping MRC higher than wage rate Equilibrium

Wage Rate (Dollars) Quantity of Labor 0 S MRP MRC c b a WcWc WmWm QmQm QcQc Examples of monopsony power Monopsony Model 13-12

Key Terms wage rate nominal wage real wage purely competitive labor market monopsony exclusive unionism occupational licensing inclusive unionism bilateral monopoly minimum wage wage differentials marginal revenue productivity noncompeting groups human capital compensating differences incentive pay plan 13-13

Chapter 14 Rent, Interest,Profit Economic rent The loanable funds theory Interest rate variation Economic profits Distribution of U.S. earnings

Economic Rent Price paid for land and other natural resources Perfectly inelasticity supply Changes in demand A surplus payment

Interest Price paid for use of money Stated as a percentage Money is not a resource Loanable funds theory –Supply of loanable funds –Demand for loanable funds

Loanable Funds Theory Extending the model Financial institutions Changes in supply –Household thrift Changes in demand –Rate of return on investment Other participants

Sources of Economic Profit Static economy Risk and profit –Insurable and uninsurable risks –Changes in economic environment, structure of economy, government policy Innovations and profit Monopoly and profit