Factor Markets: Demand for Resources

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Factor Markets Demand for Resources
2
Resource Pricing

• 1) Money-income distribution wage, rent,
  interest, profit
• 2) Resource allocation product prices indirectly
  affect resource prices directly affect
  allocative and productive
• 3) Cost minimization profit maximization
• 4) Policy issues min. wage, profit tax, etc.

3
Derived Demand

• Who wants a gallon of crude oil?
• Indirect satisfaction needs and wants
• KEY firms/employers demand resources,
  households/workers supply them

4
Marginal Revenue Product (MRP)

• 1) Productivity (marginal product)
• 2) Market value/price of good produced (revenue)
• MRP ?TR/ ?Resource Q

5
Marginal Resource Cost (MRC)

• MRC ?total resource cost/ ?resource Q
• MRPMRC rule it will be profitable for a firm
  to hire additional units of a resource up to the
  point at which that resources MRP is equal to
  its MRC.
• Inputs rather than outputs
• MRPD

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Perfect vs. Imperfect

• PC firms D for resources is downsloping solely
  because MP diminishes? fixed price
• Imperfect competitors MRP is downsloping because
  of DMR and price falls as output increases (less
  elastic D curve)
• IC firms produce less, therefore demand fewer
  resources
• EXCEPT if oligopoly tech progressive? greater
  production more resources offsets monopoly
  power restriction

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Determinants Resource Demand

• MRP derived from product demand and resource
  productivity 2 shifters
• ? Product Demand Ceteris paribus,a change in
  the demand for a product that uses a particular
  resource will change the demand for the resource
  in the same direction

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? Productivity

• Ceteris paribus, a change in the productivity of
  a resource will change the demand for the
  resource in the same direction
• 1) Quantities of other resources capital
  intensity
• 2) Technological progress quality of capital
• 2) Quality of the variable resource more skilled
  labor
• ? advanced workers paid better productivity
  major determinant of wages (except for last
  decade in US?30 increase prod, 10 increase
  wages)

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Changes Prices Other Resources

• Substitute Resources
• 1) Substitution effect a firm will purchase
  more of an input whose relative price has
  declined and vice versa
• 2) Output effect lower costs? greater output?
  increase D all resources the firm will purchase
  more of one particular input when the price of
  the other input falls and vice versa
• 3) Net effect sub and output effects work in
  opposite directions
• Depends on which is stronger

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Complementary Resources

• No substitution effect fixed proportions
• Output effect A change in the price of a
  resource will cause the demand for a
  complementary resource to change in the opposite
  direction.

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Demand for labor will increase when

• 1) demand for product increases
• 2) Productivity (MP) of labor increases
• 3) Price of substitute input decreases provided
  outputgtsub
• 4) Price of substitute input increases provided
  subgtoutput
• 5) Price of complementary input decreases
• (Reverse the effects to explain decrease labor
  demand)

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Elasticity of Resource Demand

• Erd ?RQ/ ?RP
• Erdgt1? elastic lt1? inelastic 1? unit
• Determinants
• 1) Rate of MP decline (just like MU)
• 2) Ease of substitutability (shiftability)
• 3) Elasticity of product demand go together
• 4) Ratio of resource cost to total cost larger
  proportion? greater elasticity

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Optimal Combination Resources

• 1)What combination minimizes cost?
• 2) What combination maximizes profit?
• 1) Least-Cost Rule when last dollar spent on
  each resource yields the same marginal product
  assume two inputs, labor and capital
• MPl/Pl MPc/Pc
• Basically balancing margins
• Able produce larger output specific cost
  specific output smaller cost
• All the long-run cost curvesassume that the
  least-cost combination of inputs has been
  realized at each level of output if not?
  x-inefficiency

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2) Profit-Maximizing Combo

• When each resource is employed to the point at
  which its marginal revenue product equals its
  price
• We need both PLMRPL and PCMRPC
• MRPL/PL MRPC/PC 1
• If profit-maximizing must be cost-minimizing
  reverse not necessarily true

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Marginal Productivity Theory of Income
Distribution

• Resources paid according to contribution to
  societys output Ethically? To each according
  to what he or she creates
• But
• 1) Inequality unequal distribution to begin
  with genetics social inequality property
  resources unequally distributed (inheritance)?
  govt intervention
• 2) Market imperfections