Resource Demand

1
Resource Demand

• The fun and excitement of the purchase of the
  factors of production

2
Keys to remember in the resource market

• The firms are the demanders of resources
• The households are the suppliers of resources

3
Key questions to consider

• Think like an economist, what would cause a firm
  to want to hire you?
• A firm would hire you as long as?
• What would you call a market where a firm can
  hire all the labor it wants, at the exact same
  price, and all the workers are identical?

4
Resource Demand

• The demand for resources is predicated on 2
  ideas
• The productivity of the resource
• The value of the good that is produced

• Resource demand is derived from product demand
• The more a product is demanded the more the
  resources for that product will be demanded
• Remember, in this case the firm is the CONSUMER
  and has a DEMAND curve for labor

5
Marginal Revenue Product/Marginal Resource Cost

• Marginal Revenue Product (MRP) is the additional
  revenue that is generated by the addition of one
  more worker
• We find MRP by dividing the change in total
  revenue by the change in resource input
• MRP TR/ Q

• Marginal Resource Cost (MRC) is the additional
  cost associated with the addition of one more
  worker
• We find MRC by dividing the change in Total
  Resource Cost by the change in resource input
• MRC TC/ Q

Lets re-examine one of our first questions in
economics terms A firm would be willing to hire
you as long as ?
6
MRCMRP Rule

• A firm will add an additional unit of a resource
  as long as the unit adds more to revenue than it
  does to cost
• We use the MRCMRP rule as a stop sign to let us
  know when to stop hiring additional resources

7
MRP as the Demand Curve

• MRC is the WAGE RATE for labor
• We can say that the MRC is the PRICE of
  additional labor to the firm
• At higher prices, firms employ less labor at
  lower prices firm employ more labor.
• This is for a PC market

MRC
MRP
8
Determinants of Resource Demand

• Change in Product Demand
• An increase in demand for a product will increase
  the demand for the resources to make that product
• A decrease in demand for a product will decrease
  the demand for the resources to make the product

9
Determinants of Resource Demand

• Change in Productivity
• A change in productivity of a resource will
  change the demand for that resource in the same
  direction.
• Quantities of other resources
• The productivity of labor will increase with the
  addition of capital resources
• Technological Progress
• The improvement of technology will improve the
  quality of other resources
• Quality of Variable Resources
• Improvement in the quality of the resource itself
  will increase demand for the resource

10
Determinants of Resource Demand

• Change in the price of other resources
• Substitute Resources
• Substitution Effect- with the decline in the
  price of machinery, a firm will substitute
  machinery for labor
• Output Effect- with the decline in cost form the
  substitution effect, the output will increase and
  increase the demand for labor
• Net Effect- The Substitution Effect and the
  Output Effect work in opposite directions, the
  net effect is the combination of the two
• Complementary Resources
• A change in the price of a resource will cause
  the demand for a complementary resource in the
  opposite direction

11
Elasticity of Resource Demand

• The change in the quantity of a resource used
  compared to the change in the price of that
  resource
• change Q / change in price
• Factors that affect elasticity of resource demand
• Rate of Marginal Product Decline
• The faster the decline of MP, the more inelastic
  the demand for the resource
• Ease of Substitutability
• The larger the number of close substitutes the
  greater the elasticity
• Elasticity of product demand
• The greater the elasticity of product demand the
  greater the elasticity of resource demand
• Ratio of resource to the total
• The larger the proportion of costs a resource
  makes up, the greater the elasticity of demand
  for the resource

12
The Least Cost Rule

• You are using the Least Cost Production Method
  when the last dollar spent on each resource
  yields the same marginal product per dollar
• In equation form
• MPL/PL MPc/Pc
• MPL and MPc are marginal productivity of labor
  and capital
• PL and Pc are price of labor and capital
• We should shift resources to the resource that is
  giving us MORE MP/
• When they become equal we have reached the least
  possible cost of production

13
Profit Maximizing Rule

• The profit maximizing combination of resources
  occurs when the MRP of each resource used is
  equal to the price of that resource
• Written in equation form
• MRP/P 1
• If your MRP/P ratio is greater than 1, you need
  to employ more of that resource
• If your MRP/P ratio is less than 1, you need to
  employ less of that resource

14
Lets try this
Units of Labor TP MP Product Price TR MRP
0 0   2    
           
1 17   2    
           
2 31   2    
           
3 43   2    
           
4 53   2    
           
5 60   2    
           
6 65   2    

• How many workers will the firm hire _at_ wage rate
  27.95? 19.95?

15
Perfectly Competitive Labor Market
Units of Labor TP MP Product Price TR MRP
0 0   2 0  
    17     34
1 17   2 34  
    14     28
2 31   2 62  
    12     24
3 43   2 86  
    10     20
4 53   2 106  
    7     14
5 60   2 120  
    5     10
6 65   2 130  

1. The demand curve is the MRP column
2. Why is this true?
3. The firm will hire units of labor units as long
   as MRP is greater than MRC
4. MRC is always the wage rate

16
An imperfectly competitive market for labor

• Which demand curve is more elastic?

Units of Labor TP MP Product Price TR MRP
0 0     0  
    17     37
1 17   2.20 37  
    14     29
2 31   2.15 67  
    12     24
3 43   2.10 90  
    10     18
4 53   2.05 109  
    7     11
5 60   2.00 120  
    5     7
6 65   1.95 127  
17
Profit Maximization
  MRPL PL MRPC PC
1 8 4 8 4
2 10 12 14 9
3 6 6 12 12
4 22 26 16 19

• More L, More C
• Less L, More C
• Profit Max
• Less L, Less C