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

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

3. All markets are competitive (good and resource)
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

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

5. MRP as Resource Demand Purely Competitive Firm’s Demand for A Resource
(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) 1 2 3 4 5 6 7 7 13 18 22 25 27 28 ] 7 6 5 4 3 2 1 $2 2
$ 0 14 26 36 44 50 54 56 ]
$14 12 10 8 6 4 2
Resource Wage
(Wage Rate)
Quantity of Resource Demanded -2 2 4 6 8 10 12 14 16
$18
Purely
Competitive
Firm’s
Demand for
A Resource
D=MRP 1 2 3 4 5 6 7
LO1
12-5

6. MRP as Resource Demand Imperfectly Competitive Firm’s Demand for
(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) 1 2 3 4 5 6 7 7 13 18 22 25 27 28 ] 7 6 5 4 3 2 1
$2.80
2.60
2.40
2.20
2.00
1.87
1.75
1.65
$ 0.00
18.20
31.20
39.60
44.00
46.25
47.25
46.20 ]
$18.20
13.00
8.40
4.40
2.25
1.00
-1.05 1 2 3 4 5 6 7 -2 8 10 12 14 16
$18
Resource Wage
(Wage Rate)
Quantity of Resource Demanded
Imperfectly
Competitive
Firm’s
Demand for
A Resource
D=MRP
(Pure Competition)
D=MRP
(Imperfect
Competition)
LO1
12-6

7. 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

8. 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

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

10. Elasticity of Resource Demand
Erd =
Percentage Change in Resource Quantity
Percentage Change in Resource Price
Ease of resource substitutability
Elasticity of product demand
Ratio of resource cost to total cost
LO2
12-10

11. Optimal Combination of Resources
All resource inputs are variable
Choose the optimal combination
Minimize cost of producing a given output
Maximize profit
LO3
12-11

12. Minimize cost of producing a given output
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 (MPL)
Price of Labor (PL)
Of Capital (MPC)
Price of Capital (PC) =
LO3
12-12

13. Profit Maximizing Rule
MRP of each resource equals its price PL =
MRPL
and PC =
MRPC
MRPL PL
MRPC PC =
= 1
LO3
12-13

14. Paid according to value of service Workers Resource owners Inequality
Income Distribution
Paid according to value of service
Workers
Resource owners
Inequality
Productive resources unequally distributed
Market imperfections
LO3
12-14

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