Presentation 1The Demand for Resources

Derived DemandDemand that is derived from the products

that the resource helps produceResources don’t usually go directly to satisfy

the consumer---indirectly through their use in goods and services

EX- land, tractor, farmer lead to demand for food

Derived DemandThe derived nature of resource demand

means that the strength of the demand for any resource will depend on:

1. the productivity of the resource in helping to create a good or service

2. the market value or price of the good or service it helps produce

Marginal Revenue Product (MRP)The change in a firm’s total revenue when it employs 1 additional unit of a resource

MRP = change in total revenue/change in the quantity of the resource employed

Marginal Resource Cost (MRC)The amount that each additional unit of a resource adds to the firm’s total (resource) cost

MRC = change in total (resource) cost/unit change in resource quantity

MRP=MRC RuleTo maximize profit a firm should employ the

quantity of a resource at which MRP=MRCTo maximize profit, a firm should hire any

additional units of a specific resource as long as each successive unit adds more to the firm’s TR than it adds to cost TC

Wage RateIn a competitive market, the MRC of

labor exactly equals the market wage rate

MRP as Resource DemandMRP as Resource Demand Schedule

(1)Units of

Resource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

01234567

07

131822252728

7654321

$22222222

$ 014263644505456

$141210

8642

]]]]]]]

]]]]]]]

1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Res

ou

rce

Wag

e(W

age

Rat

e)

Quantity of Resource Demanded

D=MRP

PurelyCompetitiveSeller’sDemand forA Resource

MRP as Resource DemandMRP as Resource Demand Schedule

(1)Units of

Resource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

01234567

07

131822252728

7654321

$2.802.602.402.202.001.871.751.65

$ 0.0018.2031.2039.6044.0046.2547.2546.20

$18.2013.008.404.402.251.00

-1.05

]]]]]]]

]]]]]]]

1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Res

ou

rce

Wag

e(W

age

Rat

e)

Quantity of Resource Demanded

D=MRP(Pure Competition)

ImperfectlyCompetitiveSeller’sDemand forA Resource

D=MRP(ImperfectCompetition)

W 13.1

Marginal Product (MP)Additional output resulting from

using each additional unit of laborLaw of diminishing returns applies

to marginal product---at some point the MP will decrease

Different Market StructuresIn the oligopoly, pure monopoly and

monopolistic competition, the firms are “price makers”

The firm’s product demand curve is downsloping because the firm must set a lower price to increase sales

A competitive firm is downsloping due to diminishing marginal returns

Shifts in the Curve Ex- an increase in the demand for

new houses will drive up housing prices. Those higher prices will increase the MRP of construction workers and the demand for construction workers will rise (shift to the right)

Changes in ProductivityOther things equal, an increase in

the productivity of a resource will increase the demand for the resource and a decrease in productivity will reduce the resource demand

Substitution EffectA firm will purchase more of an input

whose relative price has declined and, conversely, use less of an input whose relative price has increased

Ex- If the price of natural gas goes down, firms will use more natural gas and less petroleum or electricity

Output EffectThe situation where an increase in

the price of one input will increase the firm’s production cost and reduce its level of output, thus reducing its demand for other inputs and vice versa