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The Supply and Demand for Productive Resources

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. The Circular Flow of Goods and Services.

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The Supply and Demand for Productive Resources

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  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. 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.

  4. Demand Inversely Related to Price Substitution in production: • If one input becomes more expensive, producers will shift to lower-cost inputs. • The better the substitute inputs, the more elastic the demand for the resource. Substitution in consumption: • A high resource prices raises the product price and consumers substitute other goods. • The more elastic product’s demand, the more elastic is the demand for the resource.

  5. B 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. 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

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

  7. Shifting Resource Demand • Changes in product demand - cause the demand for its input resources to change in the same direction. • Changes in the productivity of a resource - If productivity rises, the demand rises. • Changes in the price of related inputs - The following increase resource demand: • an increase in a substitute input price • a decrease in a complimentary input price • The following decrease resource demand: • a decrease in a substitute input price • an increase in a complimentary input price

  8. The Back of the Purple 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

  9. Marginalrevenue Marginalproduct * change in output = Marginalproduct MRP change in variable input = change in revenue Marginalrevenue = change in output Hiring Resources • Hire up to where Marginal Revenue Product = Resource Price Marginal revenue product(MRP):Change in total revenue from the employment of an additional unit of a resource. Remember –

  10. The Yellow Sheet

  11. The Yellow Sheet

  12. change in (2)change in (1) = = (3) * (4) (2) * (4) = $200 1 $200 $200 2 3 $200 4 $200 $200 5 $200 6 $200 7 Numbers, Numbers, Numbers • A firm sells its product for $200 each (4). • The marginal product(3)shows how output changesas workers (units of labor) are hired • The marginal revenue product(6) shows how hiring an additional worker affects the firm’s total revenue. MRP(6) Marginal Product (3) Total Revenue (5) Price(per unit)(4) Variable factor(1) Output(per week) (2) ---- $ 0 0 0.0 ----- $1,000 1000 5.0 5.0 9.0 4.0 $1,800 800 $2,400 12.0 3.0 600 $2,800 400 14.0 2.0 $3,100 300 15.5 1.5 16.5 1.0 $3,300 200 $3,400 100 17.0 0.5

  13. Resource price Quantity Demand for Resources • The MRP curve is the firm’s short run demand curve for the resource. Variable factor MRP ---- 0 1000 1 1000 • It slopes downward because the marginal product of the resource falls as more of it is used with a fixed amount of other resources. 2 800 600 3 800 400 4 5 300 6 200 100 7 600 400 • How will they decide how many to hire? 200 1 2 3 4 5 6 7

  14. Choosing Between Resources 1. Maximize Profits – find the output level where profits are maximized. • Deal with each resource independently. • Hire until: - MRP labor = Price of labor - MRP capital = Price of capital

  15. MP of machine = rentalvalue Price ( ) of machine = MP of skilled labor MP of unskilled labor Price of unskilled labor Price of skilled labor Choosing Between Resources 2. Minimizing the Cost of Production -check the Marginal Productivity per $ -choose the greater up to desired output. • If MP labor = 15 and Price = $5, then MP/P = 3 • If MP capital = 20 and Price = $5, then MP/P = 4 • use capital

  16. The Purple Sheet • What is the least-cost combination of labor and capital to employ in producing 80 units of output? ____ C and _____ L b. What is the profit-maximizing combination of capital and labor for the firm to employ? ___ C ___ L Total output: __

  17. similar to the Purple Sheet Labor (price = $8) Capital (price = $12) Minimize cost of 50 units of output Maximize profits

  18. To maximize profits would you: (a)increase Capital (b)increase Labor (c) keep both the same (d) increase both (e) decrease one or both in the following cases: a. MRPL = $8; PL = $4; MRPC = $8, PC = $4. b. MRPL= $10; PL = $12; MRPC = $14, PC = $9. c. MRPL = $6; PL = $6; MRPC = $12, PC = $12. d. MRPL = $22; PL = $26; MRPC = $16, PC = $19

  19. 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, orresource 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.

  20. Resource price B Quantity Resource Supply 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. P2 A P1 Q1 Q2

  21. Resource price Slr B C • Given time, supply of the resource (CPAs) becomes more elastic. (SsrSlr) as more individuals choose this field of training. A Quantity Time and Resource Supply Elasticity • The supply of CPA services for example S • If CPA wages increase from P1 to P2, the short-run response will be an increase in CPA services from Q1 to Q2. Some CPAs work more and some come out of retirement. P2 P1 • At the higher wage P2,Q3 CPA services are supplied to the market. • The long-run supply of a resource is almost always more elastic than short-run supply. Q3 Q1 Q2

  22. Demand Supply and Resource Prices

  23. 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.

  24. S A D Equilibrium Wage(resource price) • market demandis downward sloping, reflecting decliningMRP • market supplyslopes upward as higher prices (wages) induce individuals to supply more. • priceP1brings the choices of buyers and sellers into harmony. P1 • At equilibrium priceP1, thequantity demandedwill just equal thequantity supplied. Quantity Q1

  25. The 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 for entrepreneurs who are able to see and act on opportunities to put resources to higher valued uses.

  26. D2 D2 Adjusting to Dynamic Change • An increase in demand for housing (product market) … leads to an increase in demand for electricians (resource market). • In the product market, the equilibrium price and output of houses both rise (to P2 and Q2). • In the resource market, the equilibrium price and output of electrician services will increase substantially (to P2 and Q2). ProductMarket ResourceMarket Ssr Price Price(wage) S P2 P2 P1 P1 D1 D1 Quantity Quantity Q1 Q2 Q1 Q2

  27. Slr Adjusting to Dynamic Change • This significant increase in price and modest increase in output is a characteristic of the highly inelastic nature of the short-run supply of the skilled electrician’s labor. • The higher resource price will attract new human capital investments and, with time, the resource supply curve will become more elastic, moderating the resource price (to P3) and increasing its quantity supplied (to Q3). ProductMarket ResourceMarket Ssr Price Price(wage) S P2 P2 P3 P1 P1 D2 D2 D1 D1 Quantity Quantity Q1 Q2 Q1 Q3 Q2

  28. The 10 Fastest Growing US Occupations in Percentage Terms, 2000-2010

  29. The 10 Most Rapidly Declining US Occupations in Percentage Terms, 2000-2010

  30. 1. The demand curve for a human resource will be more elastic the a. more and better substitutes are available for it. b. more difficult it is to substitute other resources for it. c. more inelastic the demand for the product the resource is used to produce. d. shorter the time period under consideration. 2. If skilled labor is three times the cost of unskilled labor, a profit-maximizing firm will vary the quantity of each type of labor until the a. marginal product of each is the same. b. amount of unskilled labor used is three times the quantity of skilled labor used. c. amount of unskilled labor used is one-third the quantity of skilled labor used. d. marginal product of unskilled labor is one-third that of skilled labor.

  31. 3. 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. 4. What concept implies that a firm’s MRP curve for labor will slope downward in the short run? a. diminishing marginal returns b. the law of supply c. the law of decreasing cost d. the price equalization principle 5. Which one of the following labor resources will likely have the most inelastic supply schedule in the short run? a. filling station attendants b. sales clerks c. construction laborers d. dentists

  32. 6. Suppose the United Auto Workers’ Union succeeded in obtaining a 10 percent increase in the wages of its workers and that the wage increase caused automobile prices to rise. Employment in the auto industry would be most likely to decline significantly if a. the demand for American-made automobiles was highly elastic. b. the supply of foreign-produced automobiles was highly inelastic. c. American consumers considered foreign automobiles a poor substitute for American automobiles. d. the demand for American automobiles was relatively constant and highly inelastic. 7. 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.

  33. The following chart indicates the reductions in total losses due to theft if a jewelry store hires additional security guards. Number Dollar Value of of Guards Thefts Prevented 1 150 2 250 3 340 4 420 5 490 6 540 8. If the security guards can be hired for $75 per day, how many guards should the shop hire? a. 2 b. 3 c. 4 d. 5 e. 6

  34. 9. 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. 10. 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.

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