OUTLINE - Chapter 12
– The Demand for Resources
12a
Brief Outline:
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<![endif]>4 reasons to study the
resource markets
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<![endif]>The strength of resource
demand depends on two things
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<![endif]>Find the profit
maximizing quantity of resources to employ: MRP = MRC
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<![endif]>Find the resource demand
curve: MRP
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<![endif]>The first two (of eight)
resource market models
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<![endif]>Pure competition in both
the resource and product markets
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<![endif]>Pure competition in the
resource market and imperfect competition in the product market
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<![endif]>Compare the profit
maximizing quantity (where MRP=MRC) with the allocatively
efficient quantity: (VMP = W or P x MP = W)
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<![endif]>Determinants
of Resource Demand
<![if !supportLists]>o <![endif]>Changes in Demand for the Product (Pe, Pog, I, Npot,
Tastes)
<![if !supportLists]>o <![endif]>Changes in the Productivity of the
Resource
<![if !supportLists]>o <![endif]>Changes
in the Prices of Other Resources
<![if !supportLists]>§ <![endif]>Substitutes
<![if !supportLists]>§ <![endif]>Complements
<![if !supportLists]>·
<![endif]>Price
Elasticity of Resource Demand - Determinants
<![if !supportLists]>o <![endif]>Ease of resource substitutability
<![if !supportLists]>o <![endif]>Elasticity of product demand
<![if !supportLists]>o <![endif]>Ratio of resource cost to total cost
Long Outline:
Significance of Resource Demand
- Income determination
- Cost minimization
- Resource allocation
- Policy Issues
Marginal Productivity Theory of Resource Demand
Define: Resource
Demand
Define: Derived Demand
The
strength of the resource demand for resources depends on two factors:
1. The productivity of the resource in
helping to create a good or service.
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<![endif]>a resource that is
highly productive in turning out a highly valued commodity will be in
great demand
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2. The market value or price of the good or
service it helps produce.
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<![endif]>a resource that is used
to produce highly valued product will be
in great demand
Review:
Total Product (TP)
Marginal Product (MP)
Define
MRP
Rule
for Employing Resources: MRP =MRC
12a
<![if
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<![endif]>to
maximize profits employ all where the MRP>MRC, up to where MRP=MRC
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<![endif]>this
is just benefit cost analysis: MB = MC
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<![endif]>what is the
marginal benefit to the firm of hiring one more worker? = MRP
<![if
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<![endif]>what is the
marginal cost of hiring one more worker? = MRC
How to find the resource demand curve:
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<![endif]>Review:
Demand is a schedule that shows the various quantities that will be
hired at various wage rates
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<![endif]>Firms
will hire the profit maximizing quantity
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<![endif]>So,
all we have to do is find the profit maximizing quantities of labor
at different wage rates
Value
of the Marginal Product (VMP = Product Price x MP)
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<![endif]>The value of marginal
product is the value to society of a firm hiring one more unit of a
factor of production.
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<![endif]>This is the MSB of
hiring another workeer
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<![endif]> The
value of marginal product equals the price of a unit of output
multiplied by the marginal product of the factor of production. P x
MP = VMP
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NOT IN THE TEXTBOOK:
Rule for finding the allocatively efficient
quantity to hire: VMP = W
or PxMP=W
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<![endif]>So, what quantity of
a resource should be hired to maximize society’s satisfaction? (allocative efficiency)
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<![endif]>The
quantity where MSB = MSC
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<![endif]>VMP
= MSB
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<![endif]>W
= MSC
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<![endif]>So
the best quantity of a resource to hire for society is where:
VMP = W or PxMP = W
<![if
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where P=MSB and MC=MSC, so the best quantity of a product to
produce for society was where: P=MC
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Competitive
Model:
12a
Assume perfect competition in the product market
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<![endif]>product
price is constant because each firm produces such a small fraction of
the total market supply of the product (chapter 8)
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<![endif]>means
they can sell all they want without having to lower the price
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<![endif]>therefore
in the product market: P=MR
Assume: perfect competition in the labor market
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<![endif]>wage
(resource price) is constant because each firm hires such a small
fraction of the total market supply of workers
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<![endif]>means
they can hire all they want without having to offer higher wages
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<![endif]>therefore
in the competitive labor market: W=MRC
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MRP is the Resource Demand Curve
MRP also equals VMP if the product market is competitive
So qc is the profit
maximizing quantity to hire AND the allocatively
efficient quantity to hire.
Imperfect
Product Market and Resource Demand:
12a
Assume imperfect competition in the product market (monopoly,
oligopoly, monopolistic competition)
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<![endif]>downward
sloping product demand curve
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<![endif]>means
they must lower their price to sell more
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<![endif]>therefore
in the product market P > MR
Assume: perfect competition in the labor market
<![if
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<![endif]>wage
(resource price) is constant because each firm hires such a small
fraction of the total market supply of workers
<![if
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<![endif]>means
they can hire all they want without having to offer higher wages
<![if
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<![endif]>therefore
in the competitive labor market: W=MRC
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<![endif]>QL1 is the quantity hired if the product market is imperfect
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<![endif]>QL2 is the quantity hired by a perfectly competitive producer
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<![endif]>We know a monopoly will maximize
profits by producing less output than a competitive producer, here we
see that they will also hire fewer workers
Market
Demand for a Resource: horizontal summation
Determinants of Resource Demand
<![if !supportLists]>·
<![endif]>Changes
in Demand for the Product (determinants: Pe,
Pog, I, Npot, Tastes)
<![if !supportLists]>·
<![endif]>Changes
in the Productivity of the Resource
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<![endif]>Changes in the Prices of
Other Resources
<![if !supportLists]>o <![endif]>Substitutes
<![if !supportLists]>o <![endif]>Complements
<![if !supportLists]>·
<![endif]>Changes
in Demand for the Product
<![if !supportLists]>o <![endif]>Other
things equal, an increase in the demand for a product will increase
the demand for a resource used in its production, whereas a decrease
in product demand will decrease the demand for that resource.
<![if !supportLists]>o <![endif]>Pe, Pog, I, Npot,
T
12a
<![if !supportLists]>·
<![endif]>Changes in the
Productivity of the Resource
<![if !supportLists]>o <![endif]>Other
things equal, an increase in the productivity of a resource will
increase the demand for the resource and a decrease in productivity
will reduce the demand for the resource.
<![if !supportLists]>o <![endif]>Productivity
depends on:
<![if !supportLists]>§ <![endif]>Quantity of other resources used by
the labor
<![if !supportLists]>§ <![endif]>The
greater the amount of capital and land resources used with, say,
labor, the greater will be labor's marginal productivity
and, thus, labor demand.
<![if !supportLists]>§ <![endif]>Quality of the Labor
<![if !supportLists]>§ <![endif]>Improvements
in the quality of the variable resource, such as labor, will increase
its marginal productivity and therefore its demand.
<![if !supportLists]>§ <![endif]>Technological Advance (Quality of
Capital used by labor)
<![if !supportLists]>§ <![endif]>The
better the quality of capital, the greater the productivity of
labor used with it and therefore its demand.
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<![endif]>Changes in the Prices of
Other Resources
<![if !supportLists]>o <![endif]>Substitutes
(Warning: this can be confusing.)
<![if !supportLists]>§ <![endif]>A
decrease in the price of one resources may INCREASE (output
effect) or
DECREASE (substitution effect) demand
for its substitute
<![if !supportLists]>§ <![endif]>Substitution
Effect (a decrease in the price of one resource will decrease the
demand for its substitute)
<![if !supportLists]>§ <![endif]>The
decline in the price of machinery prompts the firm to substitute
machinery for labor. This allows the firm to produce its output at
lower cost. So at the fixed wage rate, smaller quantities of labor
are now employed. This substitution effect decreases
the demand for labor.
<![if !supportLists]>§ <![endif]>Output
Effect (decrease price of one resource increases the demand for
its substitute)
<![if !supportLists]>§ <![endif]>Because
the price of machinery has fallen, the costs of producing various
outputs must also decline. With lower costs, the firm finds it
profitable to produce and sell a greater output. The greater output
increases the demand for all resources, including labor. So this
output effect. increases the demand for labor.
<![if !supportLists]>o <![endif]>Complements
<![if !supportLists]>§ <![endif]>If
resources are complements, then they must be used together (like one
worker per machine)
<![if !supportLists]>§ <![endif]>an increase in the quantity of one of them used
in the production process requires an increase in the amount used of
the other as well, and vice versa.
<![if !supportLists]>§ <![endif]>So
if the price of a machine goes down the firm will buy more machines
and this will increase the demand for labor needed to run the
machines
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<![endif]>Summary
of Changes in Resource Demand: the demand for labor
will increase (the labor demand curve will shift rightward)
when:
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<![endif]>The demand for (and
therefore the price of) the product produced by that labor
increases.
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<![endif]>The productivity (MP) of
labor increases.
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<![endif]>The price of a
substitute input decreases, provided the output effect exceeds
the substitution effect.
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<![endif]>The price of a
substitute input increases, provided the substitution effect
exceeds the output effect.
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<![endif]>The price of a
complementary input decreases.
Price Elasticity of Resource Demand
12a
<![if !supportLists]>·
<![endif]>Review
Elasticity
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<![endif]>Define
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<![endif]>Determinants
<![if !supportLists]>o <![endif]>Ease of resource substitutability
<![if !supportLists]>§ <![endif]>If there are many substitute
resources, demand for the resource is MORE ELASTIC
<![if !supportLists]>o <![endif]>Elasticity of product demand
<![if !supportLists]>§ <![endif]>If demand for the product is more
elastic, then demand for the resource is MORE ELASTIC
<![if !supportLists]>o <![endif]>Ratio of resource cost to total cost
<![if !supportLists]>§ <![endif]>If the resource cost is a large
fraction of the total costs then demand for the resource is MORE
ELASTIC
Marginal
Productivity Theory of Income Distribution
<![if !supportLists]>9. <![endif]>Minimum
Wage
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