1. The Supply and Demand for Productive Resources
Two classes of productive resources:
Non-human resources:
Physical capital
Land
Natural resources
Human resources: (Human capital)
Composed of the skills, knowledge, and experience of workers.

2. The Circular Flow of Goods and Services
Goods and Services Markets
Payments $$
. a. Businesses supply goods & services
b. Receive sales revenue.
c. Households, (investors, governments, and foreigners) demand goods.
a. Business firms demand resources
b. Households supply labor and other resources
c. in exchange for income.
Businesses
Households
Resource Markets
Resources

3. The Demand for Resources
Resource price
As a resource price increases, producers will:
use substitute resources, or
face higher costs
These lead to higher prices and a reduction in consumption. B P2
At the lower output, firms use less of the resource that increased in price. A P1
Both contribute to the inverse relationship between the price and quantity demanded of a resource. D Q2 Q1
Quantity

4. Resource Supply
Resource price
Quantity S
As a resource’s price increases, individuals have a greater incentive to supply it.
Thus, a positive relationship will exist between a resource’s price and the quantity supplied in the market. B P2 A P1 Q1 Q2

5. Equilibrium
market demand is downward sloping, reflecting declining MRP
Wage (resource price) S D
market supply slopes upward as higher prices (wages) induce individuals to supply more.
price P1 brings the choices of buyers and sellers into harmony. A P1
At equilibrium price P1, the quantity demanded will just equal the quantity supplied.
Quantity Q1

6. Annual Salary Quantity Demanded Quantity Supplied
$55, , ,000
$60, , ,000
$65, , ,000
$70, , ,000
$75, , ,000
$80, , ,000
Demand and Supply of Nurses in Minneapolis-St. Paul

7. Derived Demand for Resources
The demand for resources is derived from the demand for the products that the resources help produce.
A service station hires mechanics because of their customers’ demand for repair services.

8. Derived Demand for Resources
The demand for chefs is dependent on the demand for restaurant meals.
The demand for pharmacists is dependent on the demand for prescription drugs.
The demand for attorneys is dependent on the demand for legal services.

9. Other Demand Factors for Labor
1. Education and training:
Increased education and training increases output. (Shifts to the right.)
Increased levels of productivity increase the demand for these workers.
2. Technology:
Technology can be a substitute or a complement to labor.
If a complement, it increases the demand for certains types of labor.
If a substitute, then the demand for labor decreases. (Shifts to the left.)

10. Other Demand Factors for Labor
3. Number of companies:
More businesses, more labor. (Shifts to the right.)
Businesses leave, demand drops.
4. Regulations:
May require specific workers to carry out certain tasks (Shifts right)
May eliminate others. (Shifts to the left.)
5. Complementary Resources:
More trucks require more truck drivers (Shifts right)

11. The Green Sheet
What effect would each of the following tend to have on a firm’s demand for a particular resource, increase (a) or decrease (b)
a. An increase in the demand for the firm’s product ___
b. A decrease in the amounts of all other resources the firm employs. ____
c. An increase in the productivity of the resource ____
d. An increase in the price of a substitute resource when the output effect is greater than the substitution effect. _____
e. A decrease in the price of a complementary resource. ___
f. A decrease in the price of a substitute resource when the substitution effect is greater than the output effect. ___ a a a b b b

12. Other Supply Factors for Labor
1. Number of workers:
Increased number shifts to the right.
Policies encouraging immigration will increase the supply of labor.
2. Required education:
Keeps the supply of labor lower.
If a complement, it increases the demand for certains types of labor.
If a substitute, then the demand for labor decreases. (Shifts to the left.)

13. Other Supply Factors for Labor
3. Government policies:
Higher qualifications and licensing limit the supply of labor.
Maternity leave, unemployment insurance, and welfare programs may affect long-run supply of labor.

14. Supply Positively Related to Price
The short-run supply elasticity is determined by how easily the resource can be transferred from one use to another, or resource mobility.
If resources are highly mobile then the supply curve will be elastic even in the short run.
The supply of a resource will be more elastic in the long run than the short run.
In the long run, investment can increase the supply of both physical and human resources.

15. Earnings Differences: Skilled and Unskilled Workers
The wages of unskilled workers are low relative to skilled workers due to the less demand and large supply of skilled workers relative to unskilled workers.
Wages
Quantity Ds Ss Su Du
Skilled workers face strong demand and small supply relative to unskilled workers. Ws Wu

16. Resources Prices Determined by supply and demand.
Changes in the market prices influence the decisions of both users and suppliers.
Higher resource prices - more substitutes used.
Higher resource prices - more of the resource supplied.

17. Labor and Product Markets
Economic Examples
1. Linkage Between
Labor and Product Markets
An increase (decrease) in resource prices will reduce (increase) supply in the product market.
An increase in product demand will increase the demand for resources used in production of the good.

18. Resource Prices, and Product Markets S2 S1 DR
A reduction in the supply of unskilled labor …
pushes the wage rates of fast-food workers upward.
Resources Market
Price (wage) S2 S1
$7.50
$6.25 DR
Employment E2 E1

19. Resource Prices, and Product Markets S2 S1 DP
Higher wages cause a reduction in supply.
This leads to higher hamburger prices.
Product Market
Price S2 S1
$2.25
$2.00 DP
Quantity Q2 Q1

20. Price Controls A. Price Floors
Price floor is a legally established minimum price that buyers must pay.
It stops the price from dropping down to equilibrium level.
Example: minimum wage
The direct effect of a price floor above the equilibrium price is a surplus: quantity supplied exceeds quantity demanded.

21. The Impact of a Price Floor
A price floor like P1 sets a price above market equilibrium
Price S
Surplus P1
causing quantity supplied QD …
Price
floor
to exceed quantity demanded QS … P0
resulting in a surplus.
Non-price factors will become more important than prices in determining where scarce goods go. D
Quantity QD QS

22. Minimum Wage Effects Direct effect: Indirect effects:
Reduces employment of low-skilled labor.
Indirect effects:
Reduction in non-wage component of compensation.
Less on-the-job training.
May encourage students to drop out of school
A higher minimum wage does little to help the poor.

23. Employment and the Minimum Wage
If a price (wage) of $7.00 could bring equilibrium.
Price (wage)
Excess supply S
minimum wage (price floor) of $10.00 would increase the earnings of those who stayed employed (E1), but would reduce the employment of others.
$ 10.00
Minimum wage level
$ 7.00
Those who lose their job (E0 to E1) would be pushed into either unemployment or some other less preferred form of employment. D
Quantity (employment) E1 E0

24. 2. Increase in the Demand for Loanable Funds
Interest rate
Lending D2
At the interest rate r the quantity of loanable funds demanded by borrowers into equals quantity supplied by lenders. S
An increase in demand will move D1 to D2 r2 r1
the interest rises to r2 and increasing borrowing to Q2
Borrowing
Higher interest rates encourage additional savings, making it possible to fund more borrowing. D1
Quantity of loanable funds Q1 Q2

25. Interest Rate Financial Capital Demanded Financial Capital Supplied
(%) (Borrowing $ billions) (Lending $ billions)
$ $420
13 $ $510
15 $ $600
17 $ $660
19 $ $720
21 $ $750
Demand and Supply for Borrowing Money with Credit Cards

26. Examples: Usury laws and rent control
Price Controls
2. Price Ceilings
Price ceiling is a legally established maximum price that sellers may charge.
It stops the price from rising to the equilibrium level.
Examples: Usury laws and rent control
The direct effect of a price ceiling is a shortage: quantity demanded exceeds quantity supplied.

27. Quantity of financial capital
Example 1: Usury Laws
Interest rate
Financial capital market S
In the financial capital market the price (interest) I0 would bring the quantity of capital demanded into balance with the quantity supplied. I0
A price ceiling like I1sets a price below equilibrium …
Rate
ceiling I1
Shortage
quantity demanded QD …
exceeds quantity supplied QS … D
resulting in a shortage.
Quantity of financial capital QS QD

28. Quantity of financial capital
Example 1: Usury Laws
Interest rate
Financial capital market S
A price ceiling like I1sets a price below equilibrium …
resulting in a shortage. I2
However, some states have set the legal limit above equilibrium at (interest) I2
This would be an ineffective price floor because the rate would not rise above equilibrium rate Io. I0
Rate
ceiling I1
Shortage D
Quantity of financial capital QS QD

29. Example 2: Rent Control S D
Price (rent)
Rental housing market S
In the rental housing market the price (rent) P0 would bring the quantity of rental units demanded into balance with the quantity supplied. P0
A price ceiling like P1sets a price below equilibrium …
Price
ceiling P1
quantity demanded QD …
Shortage
exceeds quantity supplied QS …
resulting in a shortage. D
Quantity of housing units QS QD

30. Effects of Rent Control
1. The future supply of housing will decline.
2. The quality of housing will deteriorate.
3. Non-price methods of rationing will increase in importance.
4. Long-term renters will benefit at the expense of newcomers.

31. 1. The notion that the demand for inputs depends on the demand for outputs is termed
a. inverse demand. b. derived demand.
c. proportional demand. d. complementary demand.
2. If the demand for a consumer good decreases, the demand for resources required to make the good will
a. increase.
b. remain the same, but the quantity demanded will increase.
c. decrease.
d. increase or decrease depending on whether the demand for the product is elastic or inelastic.

32. 3. An increase in the demand for a product will cause
a. both the demand for and prices of the resources used to produce the product to decline.
b. both the demand for and prices of the resources used to produce the product to increase.
c. the demand for the resources used to produce the product to increase and their prices to decline.
d. the demand for the resources used to produce the product to decline and their prices to increase.
4. If the demand for workers with doctorate degrees in economics increases, we would expect
a. the wages of economists to increase in the short run and the number of economists employed to increase in the long run.
b. the supply of economists to increase in the short run and their wages to rise in the long run.
c. a rapid increase in the supply of economists, causing wages to remain constant.
d. the wages of economists to decrease in the short run and the number of economists employed to increase in the long run.

33. 5. In a market economy, which of the following is most important if one is going to achieve high earnings?
a. hard work
b. provision of goods and/or services that others value highly
c. having a graduate degree in a field like history or sociology
d. membership in a labor union
6. “Both buyers and sellers are protected by market competition. Competition is the great regulator that protects consumers against high product prices (relative to costs) and productive workers against low wages.” These statements are
a. essentially true.
b. false; competition protects consumers but cannot protect workers.
c. false; competition protects workers but cannot protect consumers.
d. true, when consumer protection organizations are active and labor unions are powerful; otherwise, it is false.