Chapter 14. The Demand for Resources

Chapter 14The Demand for ResourcesCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Significance of Resource PricingDetermines money income for the householdCost minimizationResource allocationPolicy issuesLO1Marginal Productivity Theory of Resource DemandAssume perfectly competitionProduct marketsResource marketsDerived demand for resources depends onMarginal product of the resource (MP)Price of the product it produces (P)LO2Marginal Productivity Theory of Resource DemandMarginal revenue product (MRP)Change in total revenue resulting from unit change in resource input (labor)Marginalrevenueproduct=change in total revenuechange in resource quantityLO2Marginal Productivity Theory of Resource DemandMarginal resource cost (MRC)Change in total resource cost resulting from unit change in resource input (labor)Marginalresourcecost=change in total costchange in resource quantityLO2Marginal Productivity Theory of Resource DemandMRP = MRC ruleTo maximize profit, hire additional resources as long as the additional product produced adds more to revenues than to costsMRP schedule equals the firm’s demand for laborMRC exactly equal to wage rateLO2Determinants of Resource DemandChanges in product demandChanges in productivityQuantities of other resourcesTechnological advanceQuality of the variable resourceLO3Determinants of Resource DemandChanges in price of substitute resourcesSubstitution effectOutput effectNet effectChanges in the price of complementary resourcesLO3Substitute and Complement ResourcesThe Effect of an Increase in the Price of Capital on the Demand for Labor(2)Increase in the Price of Capital(1)Relationship of Inputs(a)Substitution Effect(b)Output Effect(c)Combined EffectSubstitutes in productionLabor substituted for capitalProduction costs up, output down, and less of both capital and labor usedDL increases if the substitution effect exceeds the output effect; DL decreases if the output effect exceeds the substitution effectComplements in productionNo substitution of labor for capitalProduction costs up, output down, and less of both capital and labor usedDL decreases (because only the output effect applies)LO3Determinants of Resource DemandDeterminantExamplesChange in product demandGambling increases in popularity, increasing the demand for workers at casinos.Consumers decrease their demand for leather coats, decreasing the demand for tanners.The Federal government increases spending on homeland security, increasing the demand for security personnel.Change in productivityAn increase in the skill levels of physicians increases the demand for their services.Computer-assisted graphic design increases the productivity of , and the demand for, graphic artists.Change in the price of another resourceAn increase in the price of electricity increases the cost of producing aluminum and reduces the demand for aluminum workers.The price of security equipment used by businesses to protect against illegal entry falls, decreasing the demand for night guards.The price of cell phone equipment decreases, reducing the cost of cell phone service; this in turn increases the demand for cell phone assemblers.Health-insurance premiums rise, and firms substitute part-time workers who are not covered by insurance for full-time workers who are.LO3Occupational Employment TrendsRising employment in health servicesPersonal care aidesHome health aidesBiomedical engineersDeclining employmentShoe machine operatorsPostal service mail sortersPostal service clerksLO3Elasticity of Resource DemandElasticity of resource demandEase of resource substitutabilityElasticity of product demandRatio of resource cost to total costErd =percentage change in resource quantitypercentage change in resource priceLO4Optimal Combination of ResourcesWhat combination of resources will minimize costs at a specific output level?Least–cost combination of resourcesLeast cost ruleWhat combination of resources will maximize profit?Profit-maximizing combination of resourcesProfit maximizing ruleLO5Least Cost RuleMinimize cost of producing a given outputLast dollar spent on each resource yields the same marginal productMarginal productof labor (MPL)Price of labor (PL)Marginal productof capital (MPC)Price of capital (PC)=LO5Profit Maximizing RuleEach resource is employed to the point where its MRP is equal to its priceMRPLPLMRPCPC== 1MRPLPL=MRPCPC=andLO5Income DistributionMarginal productivity theory of income distributionPaid according to value of serviceWorkersResource ownersInequalityProductive resources unequally distributedMarket imperfectionsLO6