1. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 1 Chapter 14 The Demand for Economic Resources

2. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 2 Learning Objectives Discuss the significance of resource pricing. Introduce marginal productivity theory as a way of explaining the amounts of resources that firms use.

3. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 3 Learning Objectives (cont.) Examine the way the employment of resources may vary when there are many buyers of the resource and different forms of competition in the product market. Explain the demand for a resource, what determines changes to resource demand and what factors determine the elasticity of resource demand. Introduce the concept of monopsony.

4. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 4 Significance and Complexity of Resource Pricing? Resources are a major determinant of money incomes Resource pricing allocates resources among various industries and firms Cost minimisation Ethical and public policy issues

5. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 5 Complexities of Resource Pricing Resource demand-and-supply determines pricing and employment However, exact nature depends on: – type of resource – type of market – policies and practices of government – complications added by firms and unions

6. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 6 Marginal Productivity Theory Optimal employment of resources: MRP = MRC – To maximise profits, a firm should hire additional units of any given resource as long as each successive unit adds more to the firm’s total revenue than it does to its total costs Marginal revenue product (MRP) – Increase in total revenue resulting from the use of one additional unit of input

7. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 7 Marginal Productivity Theory (cont.) Marginal resource cost (MRC) – The increase in total resource cost resulting from the use of one additional unit of input MRP = MRC rule – Explains the way demand for economic resource is formulated – Does not explain the exact derivation of demand curve

8. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 8 Demand for a Resource Depends on two types of markets: Product market in which the firm sells and produces goods Resource market – Many buyers? – Few buyers?

9. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 9 Marginal Definitions Marginal product (MP) – Additional output resulting from the use of one additional unit of a resource, ceteris paribus Marginal revenue product (MRP) – The increase in total revenue resulting from the use of one additional unit of input MRP = MP × P

10. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 10 Resource Demand under Perfect Competition Assume perfect competition in resource market Derived demand for resource – productivity of resource in producing the good – market value of the good MRP schedule constitutes the firm’s demand for labour

11. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 11 MRP as a Demand Schedule Units of resource Total product Marginal product MP Product price Total revenue Marginal revenue product MRP ] ] ] 01234560123456 0 15 27 36 42 45 46 15 12 9 6 3 1 $ 1 1 $ 0 15 27 36 42 45 46 $ 15 12 9 6 3 1 ] ] ] ] ] ] ] ] ]

12. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 12 MRP Curve DRDR DRDR Demand for Resource: Perfect Competition 1 2 3 4 5 6 7 8 9 10 0 3 6 9 12 15 18 Resource Price (wage-rate) Quantity of Resource Demanded

13. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 13 Resource Demand under Perfect Competition Perfect competition in resource market Product demand curve is down- sloping  Firm must accept lower price in order to increase sales Comparison with perfect competition  MRP = MP × MR  MRP curve is less elastic than perfect competition  Imperfectly competitive firms less responsive to wage cuts in terms of workers employed

14. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 14 Demand for Resource: Imperfect Competition Units of resource Total product Marginal product MP Product price Total revenue Marginal revenue product MRP ] ] ] 01234560123456 15 27 36 42 45 46 15 12 9 6 3 1 $1.30 1.20 1.10 1.05 1.00 0.95 $ 0 19.50 32.40 39.60 44.10 45.00 43.70 $ 19.50 12.90 7.20 4.50 0.90 –1.30 ] ] ] ] ] ] ] ] ]

15. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 15 Demand for Resource: Imperfect Competition Quantity of Resource Demanded 1 2 3 4 5 6 7 8 9 10 0 3 6 9 12 15 18 21 Resource Price (wage-rate) –3–3 D D MRP Curve

16. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 16 Market Demand for a Resource Derived by summing up the individual demand or MRP curves for all firms Complications: – Decreased resource price may cause all firms in the industry to hire more of the resource and expand total output, thereby reducing product price – Product price falls as industry output expands, therefore true market demand curve will be less elastic than that based on constant product price

17. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 17 Changes in Resource Demand Changes in product price Changes in productivity – Quantities of other inputs used – Technological progress – Labour quality

18. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 18 Changes in Resource Demand (cont.) Prices of other resources Substitute resources – substitution effect – output effect Complementary resources

19. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 19 Elasticity of Resource Demand Rate of MP decline Ease of resource substitutability Elasticity of product demand – Greater elasticity of product demand, then greater elasticity of resource demand Resource cost–total cost ratio – The larger the contribution of a resource’s price to total costs, the greater the resource elasticity

20. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 20 Imperfect Competition in Resource Market Large firm relative to market – MRC > resource price Monopsony: one buyer of a resource – No well-defined demand curve for a resource – Many producers in product market  MRP = MRC, MP × P = MRC – One producer in product market  MRP = MRC, MP × MR = MRC

21. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 21 Next Chapter: Wage Determination