Saturday, November 1, 2008

Chapter 27

Chapter 27 – The Demand for Resources

Significance of Resource Pricing

Income determination – Resource prices determine the income of households

Resource Allocation – Resource prices allocate resources among industries/firms

Cost Minimalization – Must produce profit-maximizing output with the most efficient combination of resources

Policy Issues – To what extent should the gov’t regulate wages

Marginal Productivity Theory of Resource Demand – Firm is a resource price “pricetaker

Resource Demand as a Derived Demand

Derived Demand – Demand for Resources is derived from the products they help produce

Marginal Revenue Product – Strength of Demand depends on…Productivity of the Resource, The Market Value of the product

ProductivityMarginal Product – additional output resulting from using each additional unit of labor

Product PriceMarginal Revenue Product – the change in total revenue resulting from the use of each additional unit of a resource

Rule for Employing Resources – MRP = MRC

MRP schedule is the demand schedule for labor

Marginal resource cost (MRC) – additional in resource cost for each additional resource unit

It is profitable to hire resources until MRP = MRC

MRP as Resource Demand Schedule – In a competitive labor market, each firm is a wagetaker, hire to the point where MRP exceeds MRC. Each point on the MRP schedule constitutes a firm’s demand for labor

Resource Demand under Imperfect Product market competition

When the firm is a price maker, product price must be lowered to sell the marginal product of additional workers

Marginal Product diminishes and Product price falls as output increases

Lower price applies to all units sold

D = MRP in imperfect competition, broken line curve is that of a purely competitive seller

Resource demand curve of an imperfectly competitive seller is less elastic than that of a purely competitive seller

Downward slope is greater for a imperfectly competitive seller because the purely competitor can sell additional output a a constant price

Market Demand for a resource – sum up all the firms demands (MRP curves)

Determinants of Resource Demand – Resource demand is shifted by….

Changes in Product demand – increase in the demand for a product will increase the demand for resources used in its production, decrease in product demand will decrease the resource demand. Decline in the product demand/price will shift the resource demand curve to the left

Changes in Productivity – Increase in productivity, increase in demand. Depends on Quantities of other resources, Technological advance – lead to better quality capital

Quality of variable resource – increase in labor quantity would make a new demand curve

Changes in the Price of Other Resources

Substitute Resources – Substitution effect says that if another resource is cheaper, it will be substituted

Output effect – With lower production costs comes the increase in demand and thus need more workers

Net Effect – If Substitution effect > output effect, decrease in demand for labor and vice versa

Complementary Resources

If two resources must be used in a fixed proportion, then there is no substitution effect, only output effect

When labor and capital are complementary, a decline in the price of one increases the need for the other

Demand for labor increases when the demand for products increases, the Productivity of labor increases, The price of a substitute input decreases (if output effect > substitution effect), price of a substitute input increases (if sub effect > Output effet)

Occupational employment Trends – Increase in labor demanded results in increases in employment in that field

Fastest growing fields – in the service industry

Fastest shrinking fields – manufacturing jobs that can be automated

Elasticity of Resource Demand

Elasticity of Resource Demand = % Change in resource quantity/% change in price

Ease of Resource Substitutability – the greater the number of substitute goods, the greater the elasticity of demand for that resource

Elasticity of Product Demand – the greater the product demand elasticity, the greater the elasticity for the resources

Ratio of Resource Cost to Total Cost – The greater the percentage of cost to produce for an item, the more elastic it is

Optimal Combination of Resources

Least Cost Rule – producing at the least cost when the last dollar spent on each resource yields the same marginal product

Profit maximizing rule – Only one unique level of production that maximizes profit

MRP(resource) = P(resource) at maximum profit

Profit maximizing combination of resources – each resource follows the MRP = P rule

Producing at Least Cost – find the combination of labor and capital that will create the lowest total costs

Marginal Productivity theory of Income Distribution – income gets distributed according to contribution societies output. Workers get paid for their marginal contributions to their firmsPeople criticize this system for…

Inequality – productive resources (intelligence, physical attributes, opportunity in life) are distributed unequally. In this system, retarded people, some of whom make no contribution to society would not get paid

Market Imperfections – assumes a perfectly competitive market, real world imperfections can distort wages


Connie said...

THANK YOU SOOOOO MUCH FOR THE NOTES! finals are coming up for my econ class and I had been gone a couple of weeks so I didnt read the chapter but this will definately help me.

Roman Syed said...