Resource Demand

Resource DemandResource Demand

Resource DemandResource Demand

• An increase in the demand for a product will An increase in the demand for a product will increase the demand for a resource used in increase the demand for a resource used in its productionits production

• A decrease in product demand will decrease A decrease in product demand will decrease the demand for that resourcethe demand for that resource

Changes in ProductivityChanges in Productivity

• Three ways to alter the productivity of any Three ways to alter the productivity of any resource:resource:

1.1.Quantities of other resourcesQuantities of other resources

2.2.Technological advanceTechnological advance

3.3.Quality of the varied resourceQuality of the varied resource

Demand Curves to ShiftDemand Curves to Shift

1.1. Changes in prices of goodsChanges in prices of goods

2.2. Changes in supply of other factorsChanges in supply of other factors

3.3. Changes in technologyChanges in technology

1. Changes in prices of goods1. Changes in prices of goods

• Factor Demand = Derived DemandFactor Demand = Derived Demand

• P X MPLP X MPL

Shifts of the Value of the Marginal Product CurveShifts of the Value of the Marginal Product Curve

A B

20 85

$200

MPL1

MPL2

AC

0 5

$200

MPL3

MPL1

(a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat

Quantity of labor (workers)

Quantity of labor (workers)

Wage rate

Wage rate

Market wage rate

2. Changes in supply of other factors2. Changes in supply of other factors

• George and Martha acquire more land!George and Martha acquire more land!• Each worker now produces more wheat Each worker now produces more wheat

because they have more land to work withbecause they have more land to work with

• What happens to the Marginal Product of What happens to the Marginal Product of Labor?Labor?

• MPL will rise at any given level of employmentMPL will rise at any given level of employment

Shifts of the Value of the Marginal Product CurveShifts of the Value of the Marginal Product Curve

A B

20 85

$200

MPL1

MPL2

AC

0 5

$200

MPL3

MPL1

(a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat

Quantity of labor (workers)

Quantity of labor (workers)

Wage rate

Wage rate

Market wage rate

3. Changes in technology3. Changes in technology

• Improved technology can increase or reduce Improved technology can increase or reduce demand for a given factor of productiondemand for a given factor of production

• How can technological producer reduce factor How can technological producer reduce factor demand?demand?– Ex. Horses and Transportation RevolutionEx. Horses and Transportation Revolution

• Usual effect of technological progress is to Usual effect of technological progress is to increase demand for a given factorincrease demand for a given factor

Changes in the Prices of Other ResourcesChanges in the Prices of Other Resources

Relationship of

Inputs

Increase in the Price of Capital

Substitution Effect

Output Effect

Combined Effect

Substitutes in Production

•Labor substituted for

capital

•Production costs up, output down, and less of both capital

and labor used

•DL increases if the substitution effect exceeds the output

effect

•DL decreases if the output effect exceeds the substitution effect

Complements in Production

•No substitution of

labor for capital

•Production costs up, output down, and less of both capital

and labor used

•DL increases

Elasticity of Resource DemandElasticity of Resource Demand

• Measures the extent to which producers change Measures the extent to which producers change the quantity of a resource they hire when its the quantity of a resource they hire when its price changesprice changes

• EErd rd > 1 = resource demand is elastic> 1 = resource demand is elastic• EErd rd < 1 = resource demand is inelastic< 1 = resource demand is inelastic• EErd rd = 1 = resource demand is unit-elastic= 1 = resource demand is unit-elastic

(Erd) Elasticity of

Resource Demand =

% change in resource quantity% change in resource price

Elasticity of Resource DemandElasticity of Resource Demand

• Sustainability is a fundamental determinant Sustainability is a fundamental determinant of elasticityof elasticity

• The greater the sustainability of other The greater the sustainability of other resources, the more elastic is the demand for resources, the more elastic is the demand for a particular resourcea particular resource

Elasticity of Resource DemandElasticity of Resource Demand

• Demand for labor is a derived demand, the Demand for labor is a derived demand, the elasticity of the demand for the output that elasticity of the demand for the output that the labor is producing will influence the the labor is producing will influence the elasticity of the demand for laborelasticity of the demand for labor

• Greater the price elasticity of product Greater the price elasticity of product demand, the greater the elasticity of demand, the greater the elasticity of resource demandresource demand

Optimal Combination of Optimal Combination of ResourcesResources

• What combination of resources a firm will What combination of resources a firm will choose when ALL its inputs are variable?choose when ALL its inputs are variable?

• What combination of resources will minimize What combination of resources will minimize costs at a specific level of output?costs at a specific level of output?– Least-cost combination of resourcesLeast-cost combination of resources– The last dollar spend on each resource yields that The last dollar spend on each resource yields that

same MPsame MP

Marginal Product of Labor (MPL) = Marginal Product of Capital

(MPC)

Price of Labor (PL) Price of Capital (PC)

Optimal Combination of Optimal Combination of ResourcesResources

• Profit-Maximizing combination of resources Profit-Maximizing combination of resources is when each resource is employed to the is when each resource is employed to the point at which its marginal revenue product point at which its marginal revenue product equals its resource priceequals its resource price

• Labor – PL = MRPLLabor – PL = MRPL

• Capital – PC = MRPCCapital – PC = MRPC

Resource Demand NotesResource Demand Notes

Resource DemandResource Demand

• A decrease in product demand will decrease A decrease in product demand will decrease the demand for that resourcethe demand for that resource

Changes in ProductivityChanges in Productivity

• Three ways to alter the productivity of any Three ways to alter the productivity of any resource:resource:

Demand Curves to ShiftDemand Curves to Shift

1.1. Changes in _________________Changes in _________________

2.2. Changes in _________________Changes in _________________

3.3. Changes in _________________Changes in _________________

1. Changes in prices of goods1. Changes in prices of goods

• Factor Demand = _______________Factor Demand = _______________

• P X MPLP X MPL

Shifts of the Value of the Marginal Product CurveShifts of the Value of the Marginal Product Curve

A B

20 85

$200

MPL1

MPL2

AC

0 5

$200

MPL3

MPL1

(a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat

Quantity of labor (workers)

Quantity of labor (workers)

Wage rate

Wage rate

Market wage rate

2. Changes in supply of other factors2. Changes in supply of other factors

• George and Martha acquire more land!George and Martha acquire more land!• Each worker now produces more wheat Each worker now produces more wheat

because they have more land to work withbecause they have more land to work with

• What happens to the Marginal Product of What happens to the Marginal Product of Labor?Labor?

Shifts of the Value of the Marginal Product CurveShifts of the Value of the Marginal Product Curve

A B

20 85

$200

MPL1

MPL2

AC

0 5

$200

MPL3

MPL1

(a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat

Quantity of labor (workers)

Quantity of labor (workers)

Wage rate

Wage rate

Market wage rate

3. Changes in technology3. Changes in technology

• Improved technology can increase or reduce Improved technology can increase or reduce demand for a given factor of productiondemand for a given factor of production

• How can technological producer reduce How can technological producer reduce factor demand?factor demand?

Changes in the Prices of Other ResourcesChanges in the Prices of Other Resources

Relationship of

Inputs

Increase in the Price of Capital

Substitutes in Production

•Labor substituted for

capital

•Production costs up, output down, and less of both capital

and labor used

•DL increases if the substitution effect exceeds the output

effect

•DL decreases if the output effect exceeds the substitution effect

Complements in Production

•No substitution of

labor for capital

•Production costs up, output down, and less of both capital

and labor used

•DL increases

Elasticity of Resource DemandElasticity of Resource Demand

• Measures the extent to which producers change Measures the extent to which producers change the quantity of a resource they hire when its the quantity of a resource they hire when its price changesprice changes

• EErd rd > 1 = resource demand is _________> 1 = resource demand is _________• EErd rd < 1 = resource demand is _________< 1 = resource demand is _________• EErd rd = 1 = resource demand is _________= 1 = resource demand is _________

(Erd) Elasticity of

Resource Demand =

Elasticity of Resource DemandElasticity of Resource Demand

• Sustainability is a fundamental determinant Sustainability is a fundamental determinant of elasticityof elasticity

Elasticity of Resource DemandElasticity of Resource Demand

• Demand for labor is a derived demand, the Demand for labor is a derived demand, the elasticity of the demand for the output that elasticity of the demand for the output that the labor is producing will influence the the labor is producing will influence the elasticity of the demand for laborelasticity of the demand for labor

• Greater the price elasticity of product Greater the price elasticity of product demand, the greater the elasticity of demand, the greater the elasticity of resource demandresource demand

Optimal Combination of Optimal Combination of ResourcesResources

• What combination of resources a firm will What combination of resources a firm will choose when ALL its inputs are variable?choose when ALL its inputs are variable?

• What combination of resources will minimize What combination of resources will minimize costs at a specific level of output?costs at a specific level of output?– Least-cost combination of resourcesLeast-cost combination of resources– The last dollar spend on each resource yields that The last dollar spend on each resource yields that

same MPsame MP

=

Optimal Combination of Optimal Combination of ResourcesResources

• Profit-Maximizing combination of resources Profit-Maximizing combination of resources is when each resource is employed to the is when each resource is employed to the point at which its marginal revenue product point at which its marginal revenue product equals its resource priceequals its resource price

• Labor – ____ = ____Labor – ____ = ____

• Capital – ____ = ____Capital – ____ = ____