The Demand for Resources

1
The Demand for Resources

• Chapter 14

2
Significance of Resource Pricing

• Money-income determination
• Resource allocation
• Cost minimization
• Ethical questions policy issues

3
Derived Demand

• The demand for resources is derived. Its derived
  from products that they help produce.
• Resources dont directly satisfy customer wants
  but do so indirectly through producing goods
  services.

4
Marginal Revenue Product (MRP)

• Change in total revenue resulting from the use of
  each additional unit of resource.
• Marginal resource cost- amount that each
  additional unit of a resource adds to the firms
  total cost.

5
Marginal Revenue Product

• Strength of demand for any resources depends on
• Productivity of the resource
• Market value of the product it produces

6
Marginal Product (MP)

• Additional output resulting from each additional
  resource unit.
• Eventually the law of diminishing returns set in.

7
Resource Demand Schedule
Units of Resource Total Product (Output) MP Price TR MRP
0 0 --- 2 0 ---
1 7 7 2 14 14
2 13 6 2 26 12
3 18 5 2 36 10
4 22 4 2 44 8
5 25 3 2 50 6
6 27 2 2 54 4
7 28 1 2 56 2
8
Rule for hiring resources (labor)

• Keep hiring as long as it adds more revenue than
  cost.
• MRPMRC (Similar to PMP discussion)

9
MRP as Resource Demand Schedule

• In a purely competitive labor market, market
  supply demand establish the wage rate.
• Individual firms wage taker

10
Resource Demand under Imperfect Competition
(Oligopoly, Monopoly, etc.)

• Individual firm wage maker
• Produce less output than a purely competitive
  seller
• By producing less, fewer resources are demanded

11
Determinants of Resource Demand

• Changes in product demand
• Changes in productivity
• Quantities of other resources
• Technological progress
• Quality of the variable resource

12
Changes in the prices of other resources

• Substitute resources
• Substitution effect
• A firm will purchase more of a resource whose
  price has declined
• Output effect
• Output will increase when price of a resource
  declines
• Complementary resources

13
Occupational Employment Trends

• Service occupations along with technology and
  health care dominate the list.
• Increase in women workers
• Decline in union membership
• More service jobs (safer)
• More women workers (less likely to join unions)

14
Income distribution

• Income gets distributed according to contribution
  to societys output.
• Criticisms
• Inequality
• Market imperfections