The Demand
for Resources
27C H A P T E R
MARGINAL PRODUCTIVITY
THEORY OF RESOURCE DEMAND
Derived Demand – The
Demand for a resource
that depends on the
demand for ...
Marginal Revenue Product
(MRP) = The chance in a firm’s
total revenue when it employs
1 additional unit of a resource
Marg...
MARGINAL PRODUCTIVITY
THEORY OF RESOURCE DEMAND
Rule for Employing
Resources:
MRP = MRC
Marginal
Resource
Cost
=
Change in...
Percentage of Labor Force
0 25 50 75 100
Developing
Countries
Industrially
Advanced
Countries
United
States
Agriculture
Ag...
Units of
Resource
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Total
Revenue
Marginal
Revenue
Product (MRP)
...
Units of
Resource
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Total
Revenue
Marginal
Revenue
Product (MRP)
...
Units of
Resource
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Total
Revenue
Marginal
Revenue
Product (MRP)
...
Units of
Resource
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Total
Revenue
Marginal
Revenue
Product (MRP)
...
Units of
Resource
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Total
Revenue
Marginal
Revenue
Product (MRP)
...
Units of
Resource
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Total
Revenue
Marginal
Revenue
Product (MRP)
...
Units of
Resource
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Total
Revenue
Marginal
Revenue
Product (MRP)
...
Big Ideas about Factor,
or Resource Markets
 The economic concepts are similar
to those for product markets
 The demand ...
Big Ideas about Factor,
or Resource Markets
 A firm tries to hire additional units of
a resource up to the point where
th...
Big Ideas about Factor,
or Resource Markets
 If You Want a High Wage:
a. Make something people will pay a lot
of $ for.
b...
ELASTICITY OF RESOURCE DEMAND
Ease of Resource
Substitutability
Elasticity of Product Demand
Ratio of Resource Cost to
Erd...
OPTIMUM COMBINATION
OF RESOURCES
Least-Cost Rule
Profit-Maximizing Combination
MP of Labor MP of Capital
Price of Labor Pr...
MARGINAL PRODUCTIVITY THEORY
OF INCOME DISTRIBUTION
Inequality
Market
Imperfections
derived demand
marginal product (MP)
marginal revenue product (MRP)
marginal resource cost (MRC)
MRP = MRC rule
substituti...
Wage
Determination
Chapter 28
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AP Micro: The Demand for Resources

  1. 1. The Demand for Resources 27C H A P T E R
  2. 2. MARGINAL PRODUCTIVITY THEORY OF RESOURCE DEMAND Derived Demand – The Demand for a resource that depends on the demand for the products it helps to produce
  3. 3. Marginal Revenue Product (MRP) = The chance in a firm’s total revenue when it employs 1 additional unit of a resource Marginal Revenue Product = Change in Total Revenue Unit change in Resource Quantity
  4. 4. MARGINAL PRODUCTIVITY THEORY OF RESOURCE DEMAND Rule for Employing Resources: MRP = MRC Marginal Resource Cost = Change in Total (Resource) Cost Unit change in Resource Quantity
  5. 5. Percentage of Labor Force 0 25 50 75 100 Developing Countries Industrially Advanced Countries United States Agriculture Agriculture Agriculture Industry Industry Industry Services Services Services GLOBAL PERSPECTIVE Labor Demand and Allocation: Selected Nations Source: International Labour Organization
  6. 6. Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resourceprice (wagerate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] ] ] ] ] ] ] 0 0 $2 $ 0 Consider the case of resource demand under Pure Competition
  7. 7. Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resourceprice (wagerate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0 1 0 7 7 $2 2 $ 0 14 $ 14
  8. 8. Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resourceprice (wagerate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0 1 2 0 7 13 7 6 $2 2 2 $ 0 14 26 $ 14 12
  9. 9. Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resourceprice (wagerate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0 1 2 3 0 7 13 18 7 6 5 $2 2 2 2 $ 0 14 26 36 $ 14 12 10
  10. 10. Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resourceprice (wagerate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 7 6 5 4 3 2 1 $2 2 2 2 2 2 2 2 $ 0 14 26 36 44 50 54 56 $ 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource
  11. 11. Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resourceprice (wagerate) Quantity of resource demanded Pure Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 7 6 5 4 3 2 1 $2 2 2 2 2 2 2 2 $ 0 14 26 36 44 50 54 56 $ 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource Now, consider the case of resource demand under Imperfect Competition
  12. 12. Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q P 14 12 10 8 6 4 2 Resourceprice (wagerate) Quantity of resource demanded Imperfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 7 6 5 4 3 2 1 $2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65 $ 0 18.20 31.20 39.60 44.00 46.25 47.25 46.20 $ 18.20 13.00 8.40 4.40 2.25 1.00 -1.05 The imperfectly Competitive seller’s demand for a resource
  13. 13. Big Ideas about Factor, or Resource Markets  The economic concepts are similar to those for product markets  The demand for a factor of production is derived from the demand for the good or service produced from this resource.
  14. 14. Big Ideas about Factor, or Resource Markets  A firm tries to hire additional units of a resource up to the point where the resource’s marginal revenue product (MRP) is equal to its marginal resource cost (MRC)  In hiring labor, a perfectly competitive firm will do best if it hires up to the point where MPR = the wage rate. Wages are the
  15. 15. Big Ideas about Factor, or Resource Markets  If You Want a High Wage: a. Make something people will pay a lot of $ for. b. Work for a highly productive firm. c. Be in relatively short supply d. Invest in your human capital  Real wages depend on productivity  Productivity depends on real or physical capital, human capital, labor quality and technology.
  16. 16. ELASTICITY OF RESOURCE DEMAND Ease of Resource Substitutability Elasticity of Product Demand Ratio of Resource Cost to Erd = Percentage change in resource price Percentage change in resource quantity Erd > 1 is Elastic Erd = 1 is Unit-Elastic Erd < 1 is Inelastic
  17. 17. OPTIMUM COMBINATION OF RESOURCES Least-Cost Rule Profit-Maximizing Combination MP of Labor MP of Capital Price of Labor Price of Capital MRPL PL MRPC PC 1 Least-Cost Combination of Resources
  18. 18. MARGINAL PRODUCTIVITY THEORY OF INCOME DISTRIBUTION Inequality Market Imperfections
  19. 19. derived demand marginal product (MP) marginal revenue product (MRP) marginal resource cost (MRC) MRP = MRC rule substitution effect output effect elasticity of resource demand least-cost combination of resources profit-maximizing combination of resources marginal productivity theory of income distribution ENDBACKCopyright McGraw-Hill/Irwin, Inc. 2005
  20. 20. Wage Determination Chapter 28 NEXT

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