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 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 Resource Demand

5. 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 Marginal Revenue Product/Marginal Resource Cost 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 • We always hire additional input at MRC=MRP • 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. Homework # 2 • 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