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Micro Chapter 25

Micro Chapter 25. Presentation 2. Complementary Resources. “go together” and are jointly demanded 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. Demand for Labor Will Increase:.

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Micro Chapter 25

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  1. Micro Chapter 25 Presentation 2

  2. Complementary Resources • “go together” and are jointly demanded • 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

  3. Demand for Labor Will Increase: • 1. the demand for the product produced by that labor increases • 2. the productivity of labor increases • 3. the price of a substitute increases • 4. the price of a complementary input decreases

  4. Changes in Occupations • Many of the fastest growing jobs are part of the health-care industry: a. aging population of baby-boomers b. increased availability of insurance

  5. Percentage Change in Resource Quantity Erd = Percentage Change in Resource Price O 25.1 Elasticity of Resource Demand • The sensitivity of producers to changes in resource prices

  6. Elasticity of Resource Demand Cont’d • When Erd is greater than 1, resource demand is elastic • When Erd is less than 1, resource demand is inelastic • When Erd equals 1, resource demand is unit elastic

  7. Least-Cost Combination of Resources • The last dollar spent on each resource yields the same marginal product

  8. Marginal Product Of Capital (MPC) Marginal Product Of Labor (MPL) = Price of Capital (PC) Price of Labor (PL) Least-Cost Combination of Resources

  9. W 25.2 PL = MRPL PC = MRPC and MRPL MRPC =1 = PL PC Optimal Combination of Resources • The Profit-Maximizing Rule • Profit Maximizing Combination of Resources

  10. Practice Problem • Assume that a purely competitive firm uses two resources, labor (L) and capital (C), to produce a product. In which situation would the firm be maximizing profit? Answer: C

  11. Marginal Productivity Theory of Income Distribution • The idea that the distribution of income is equitable when each unit of resource receives a money payment equal to its marginal contribution to the firm’s revenue • “to each according to what he or she creates” • Each worker contributes as much output as he is paid

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