Resource Demand

1. Resource Demand The fun and excitement of the purchase of the factors of production

2. Keys to remember in the resource market • The firms are the demanders of resources • The households are the suppliers of resources

3. Key questions to consider • Think like an economist, what would cause a firm to want to hire you? • A firm would hire you as long as…? • What would you call a market where a firm can hire all the labor it wants, at the exact same price, and all the workers are identical?

4. Resource Demand • Resource demand is derived from product demand • The more a product is demanded; the more the resources for that product will be demanded • Remember, in this case the firm is the CONSUMER and has a DEMAND curve for labor • The demand for resources is predicated on 2 ideas: • The productivity of the resource • The value of the good that is produced

5. Marginal Revenue Product/Marginal Resource Cost • Marginal Revenue Product (MRP) is the additional revenue that is generated by the addition of one more worker • We find MRP by dividing the change in total revenue by the change in resource input • MRP= TR/ Q • Marginal Resource Cost (MRC) is the additional cost associated with the addition of one more worker • We find MRC by dividing the change in Total Resource Cost by the change in resource input • MRC= TC/ Q Let’s re-examine one of our first questions in economics terms: A firm would be willing to hire you as long as …?

6. MRC=MRP Rule • A firm will add an additional unit of a resource as long as the unit adds more to revenue than it does to cost • We use the MRC=MRP rule as a stop sign to let us know when to stop hiring additional resources

7. MRP as the Demand Curve • MRC is the WAGE RATE for labor • We can say that the MRC is the PRICE of additional labor to the firm • At higher prices, firms employ less labor; at lower prices firm employ more labor. • This is for a PC market MRC MRP

8. Determinants of Resource Demand • Change in Product Demand • An increase in demand for a product will increase the demand for the resources to make that product • A decrease in demand for a product will decrease the demand for the resources to make the product

9. Determinants of Resource Demand • Change in Productivity • A change in productivity of a resource will change the demand for that resource in the same direction. • Quantities of other resources • The productivity of labor will increase with the addition of capital resources • Technological Progress • The improvement of technology will improve the quality of other resources • Quality of Variable Resources • Improvement in the quality of the resource itself will increase demand for the resource

10. Determinants of Resource Demand • Change in the price of other resources • Substitute Resources • Substitution Effect- with the decline in the price of machinery, a firm will substitute machinery for labor • Output Effect- with the decline in cost form the substitution effect, the output will increase and increase the demand for labor • Net Effect- The Substitution Effect and the Output Effect work in opposite directions, the net effect is the combination of the two • Complementary Resources • A change in the price of a resource will cause the demand for a complementary resource in the opposite direction

11. Elasticity of Resource Demand • The change in the quantity of a resource used compared to the change in the price of that resource • % change Q / % change in price • Factors that affect elasticity of resource demand • Rate of Marginal Product Decline • The faster the decline of MP, the more inelastic the demand for the resource • Ease of Substitutability • The larger the number of close substitutes the greater the elasticity • Elasticity of product demand • The greater the elasticity of product demand the greater the elasticity of resource demand • Ratio of resource to the total • The larger the proportion of costs a resource makes up, the greater the elasticity of demand for the resource

12. The Least Cost Rule • You are using the Least Cost Production Method when the last dollar spent on each resource yields the same marginal product per dollar • In equation form: • MPL/PL = MPc/Pc • MPL and MPc are marginal productivity of labor and capital • PL and Pc are price of labor and capital • We should shift resources to the resource that is giving us MORE MP/$ • When they become equal we have reached the least possible cost of production

13. Profit Maximizing Rule • The profit maximizing combination of resources occurs when the MRP of each resource used is equal to the price of that resource • Written in equation form • MRP/P = 1 • If your MRP/P ratio is greater than 1, you need to employ more of that resource • If your MRP/P ratio is less than 1, you need to employ less of that resource

14. Let’s try this… • How many workers will the firm hire @ wage rate $27.95?; $19.95?

15. Perfectly Competitive Labor Market • The demand curve is the MRP column • Why is this true? • The firm will hire units of labor units as long as MRP is greater than MRC • MRC is always the wage rate

16. An imperfectly competitive market for labor • Which demand curve is more elastic?

17. Profit Maximization • More L, More C • Less L, More C • Profit Max • Less L, Less C