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Resource Markets

Resource Markets. 1. Introduction. Introduction. Productive assets are bought and sold in resource markets. These markets help determine what is produced, how it is produced, and the distribution of income. S. Product. Markets. D. Business Firms. Households. S. Resource. Markets. D.

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Resource Markets

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  1. Resource Markets

  2. 1. Introduction

  3. Introduction • Productive assets are bought and sold in resource markets. • These markets help determine what is produced, how it is produced, and the distribution of income.

  4. S Product Markets D Business Firms Households S Resource Markets D The Market for Resources • Until now we have focused on the product markets, where house- holds demand goods and services supplied by firms (upper loop). • Now we turn to resource market, where firms demand factors of production - human capital and physical capital which are supplied by households in exchange for income (bottom loop).

  5. 2. Human and Non-human Resources

  6. Human and Non-human Resources • There two classes of productive resources: • Non-human resources • Physical capital • Land • Natural resources • Human resources • Composed of skills and knowledge of workers

  7. Human and Non-human Resources • Investment in human capital refers to activities that increase the human capital and productivity of individuals. • Ex: education, training, experience.

  8. 22,746 14,957 32,611 22,656 39,367 26,562 55,832 37,319 71,225 46,072 93,106 60,468 Education Leads to Higher Earnings Level ofSchooling Less than9th Grade Men • To the right are the mean earnings of males and females by degree of education for 1997. Women HighSchool Some College • The earnings of both men and women increased with education. Bachelor’sDegree • Note, though, that women’s earnings were only about 2/3 those of similarly educated men. Master’sDegree DoctoralDegree 0 20,000 40,000 60,000 80,000 100,000 1997 Mean Earnings of Year-Round Full-Time Workers

  9. 3. Demand for Resources

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

  11. B A Demand for Resources Price of Resource • As the price of a resource increases, producers that use the resource intensely will: • turn to substitute resources, and/or • face higher costs P2 P1 D Q2 Q1 Quantity of Resource

  12. With time, the demand of a resource becomes more elastic (Dsr Dlr): C B A Dlr Time and the Demand for Resources Price of Resource • the easier it is for firms to switch to substitute inputs, and/or • the more elastic the demand for the products the resource helps to produce. P2 • As has been demonstrated here, the long-run demand for a resource is almost always more elastic than the demand in the short-run. P1 Dsr Q3 Q2 Q1 Quantity of Resource

  13. Factors Shifting Resource Demand Curves • A change in the demand for a product will cause the demand for the resources used to produce the product to change in the same direction. • Change in the productivity of a resource will alter resource demand. • If productivity of a resource rises, the demand for the resource will rise.

  14. Factors Shifting Resource Demand Curves • A change in the price of related inputs will alter the demand for a resource. • The following will increase the demand for a resource: • an increase in the price of a substitute input • a decrease in the price of a complimentary input • The following will decrease the demand for a resource: • a decrease in the price of a substitute input • an increase in the price of a complimentary input

  15. 4. Marginal Productivity and the Firm’s Hiring Decision

  16. * MarginalProduct = MarginalRevenue MRP Hiring Decision • Profit-maximizing firms will hire additional units of a resource up to the point where the marginal revenue product of the resource equals its price • Marginal revenue product (MRP) is the change in total revenue that results from the employment of an additional unit of a resource.

  17. $ 0 $200 0 0.0 ----- $200 5.0 5.0 $1,000 1 2 $200 4.0 9.0 $1,800 3 $200 3.0 12.0 $2,400 $200 2.0 14.0 4 $2,800 $200 1.5 5 15.5 $3,100 1.0 16. 5 $200 $3,300 6 0.5 17.5 $3,400 7 $200 Short-run Demand Schedule of a Firm • In the numerical example below, a computer company uses both technology and data-entry operators to provide services in a competitive market. For each unit processed the firm receives $200 (4). • Column (2) shows how total output changes as additional data-entry operators are hired (given a fixed capital level). • The Marginal Revenue Product schedule (6) indicates how hiring an additional operator affects the total revenue of the firm. MPchange in (2)change in (1)(3) Units of Variable Factor(1) TotalRevenue(2) * (4)(5) Sales Price(Per Unit)(4) MRP (3) * (4)(6) Total Output(units per week) (2) ---- 1000 800 600 400 300 200 100

  18. 5. Supply of Resources

  19. Supply of Resources • The amount of a resource supplied is directly related to its price. • The supply curve represents the best allocation of w worker’s time between work and leisure at each price. • The short-run supply elasticity of a resource is determined by how easily the resource can be transferred from one use to another, or resource mobility. • If resources are highly mobile than the supply curve will be elastic even in the short run.

  20. B A Supply of a Resource Price of Resource S • As the price of a resource increases, individuals have a greater incentive to supply it. P2 • Therefore, a direct relationship will exist between the price of a resource and the quantity supplied. P1 Q1 Q2 Quantity of Resource

  21. Typical Labor Supply When a person’s wage rate rises…. 1. Substitution effect: Leisure becomes more expensive... Worker will want to work more 2. Income effect: Worker has increased wealth to spend on other things... Worker will want to work less Which effect is stronger depends on... A. Wage levels B. Personal preferences

  22. Price of Resource Income effects outweigh substitution effects Income effects balance substitution effects Substitution effects outweigh income effects Quantity of Resource

  23. Slr B C A • Given more time, the supply of the resource (CPAs) becomes more elastic (Ssr Slr) as more individuals choose this field of training: Time and the Elasticity of Supply for Resources Price of Resource • The supply of Certified Public Accountant (CPA) services is an example of a resource that requires a substantial period of time before the current investment is realized in the future expansion of quantity supplied. Ssr • If the wage for CPA’s increases from P1 to P2, the short-run response will be an increase in CPA services from Q1 to Q2. Some CPAs work more hours and some CPAs come out of retirement. P2 P2 P1 • Now at the higher wage (P2) the quantity supplied in the market is Q3. • As has been demonstrated here, the long-run supply of a resource is almost always more elastic than the supply of that resource in the short-run. Q1 Q2 Q3 Quantity of Resource

  24. Factors that shift the Market Labor Supply Curve A change in... • birth rates • immigration policy • social security rules and provisions • attitudes

  25. 6. Supply, Demand, and Resource Prices

  26. Resource Prices • The prices of resources are determined by supply and demand. • Changes in the market prices of resources will influence the decisions of both users and suppliers. • Higher resource prices give users a greater incentive to use substitutes. • Higher resource prices give suppliers a greater incentive to provide more of the resource.

  27. S A D Equilibrium in a Resource Market Price(Wage) • The market demand for a resource, such as engineering, is a downward sloping curve, reflecting the declining MRP of the resource. • The market supply curve slopes upward since higher resource prices (wages) will induce individuals to supply more of a resource. P1 • Resource price P1 brings the choices of buyers and sellers into harmony. • At the equilibrium price (P1), the quantity demanded will just equal the quantity supplied. Q1 Quantity of Engineering Services

  28. Coordinating Function of Resource Prices • Changes in resource prices in response to changing market conditions are essential for efficient allocation of resources. • Profit is a reward that accrues to entrepreneurs who are able to see and act on opportunities to put resources to higher valued uses.

  29. Ssr Slr D2 D2 D1 D1 Adjusting to Dynamic Change • will lead to an increase in demand for the services of construction engineers (resources market). • An increase in demand for housing (product market) . . . • In the product market, the equilibrium price of houses increases to P2, with output level Q2. In the resources market, initially the equilibrium resource price will increase substantially (from P1to P2, with quantity supplied adjusting to Q2) as the supply of the resource is highly inelastic in the short-run. • The higher resource price will attract additional human capital investments and, with time, the resource supply curve will become more elastic, moderating the resource price (P2decreases to P3) and increasing its quantity supplied (to Q3). Price Price(wage) S P2 P2 P3 P1 P1 Q1 Q3 Q1 Q2 Quantity Quantity ProductMarket ResourcesMarket Q2

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