Resource Markets
CHAPTER 15
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Resource Markets
Resource market: a market that provides one of the resources for
producing goods and services: labor, capital, land.
◦ Rent and quantity of land used are determined in the land market
◦ The wage rate and the number of people employed are determined in the
labor market
◦ The interest rate and the quantity of capital used are determined in the
capital market
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Firms and Households
In resource markets, the roles of firms and households are reversed
from what they are in the product markets.
Households are the sellers of resources, and firms are the buyers of
resources.
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The Market for Resources
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Derived Demand
Resources are not wanted for themselves, but rather for what they can
produce.
The demand for resources is a derived demand—it is driven by the
firms’ needs in order to supply goods and services to the goods and
services markets.
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The Firm’s Demand
Firms maximize profit when they operate at the level where marginal
revenue (MR) equals marginal cost (MC).
For resource markets, MR is called the marginal revenue product, MRP, and
MC is called the marginal factor cost, MFC.
Marginal revenue product (MRP): the additional revenue that an additional
resource can create for a firm.
Marginal factor cost (MFC): the additional cost of an additional unit of a
resource.
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Market Demand
The demand curve for a resource slopes downward because as the price
of a resource falls, everything else constant, producers are more willing
and able to use that resource instead of others.
This is the law of diminishing marginal product.
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Resource Market Demand and
Market Supply
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Marginal Factor Cost
The marginal factor cost (MFC) is the cost of an additional
unit of resource.
Resources will be employed up to the point at which
MRP=MFC.
Until this point, additional units of resource produce
more revenue than they cost—they add to profits.
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Hiring Resources in a Perfectly
Competitive Market
If the firm is purchasing resources in a market where there is a very
large number of suppliers of an identical resource—a perfectly
competitive resource market—the price of each additional unit of the
resource to the firm is constant.
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The Employment of Resources
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Monopsony
A monopsonist is a firm that is the only buyer of a resource.
In the early days of the U.S., many towns sprung up around a single firm
which was essentially the only employer in the town. This allowed the
firm enormous market power in terms of wage setting and hiring
practices.
A monopsony firm is able to pay resources less than their MRPs.
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McDonald’s a Monopsony?
McDonald’s is the largest single purchaser of American beef, buying
nearly one billion pounds per year.
McDonald’s operates 30,000 restaurants in 120 countries and
employees over 12 million workers.
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When Hiring More than One
Resource
At equilibrium, the last dollar spent on resource must yield the same
marginal revenue product no matter what resource the dollar is spent
on.
MRPland MRPlabor
MRPn


MFCland MFClabor
MFCn
If a resource is very expensive relative to other resources, it must
generate a significantly larger MRP than the other resource.
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Product Market Structures and
Resource Demand
Firms purchase the types and quantities of resource services that allow
them to maximize profit.
Each firm equates the MRP per dollar of expenditure on all resource
services used.
The MRP depends on the market structure in which the firm sells its
output.
A perfectly competitive firm will hire and acquire more resources than
firms selling in monopoly, oligopoly, or monopolistically competitive
product markets.
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Resource Supplies
Households supply resources in order to maximize utility.
The quantity of resources that are supplied depends on the
wages, rents, interest, and profits offered for those
resources.
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Economic Rent
When a resource has a perfectly inelastic supply, its pay or earnings is called
economic rent.
If a resource has a perfectly elastic supply curve, its pay or earnings is called
transfer earnings, what a resource could earn in its best alternative use. It is
the amount that must be paid to get the resource to “transfer” to another
use.
Economic rent is earnings in excess of transfer earnings.
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