Micro Chapter 25 Presentation 2 Complementary Resources • “go together” and are jointly demanded • An increase in the quantity of one of them used in the production process requires an increase in the amount used of the other as well Demand for Labor Will Increase: • 1. the demand for the product produced by that labor increases • 2. the productivity of labor increases • 3. the price of a substitute increases • 4. the price of a complementary input decreases Changes in Occupations • Many of the fastest growing jobs are part of the health-care industry: a. aging population of baby-boomers b. increased availability of insurance Elasticity of Resource Demand Erd = Percentage Change in Resource Quantity Percentage Change in Resource Price • The sensitivity of producers to changes in resource prices O 25.1 Elasticity of Resource Demand Cont’d • When Erd is greater than 1, resource demand is elastic • When Erd is less than 1, resource demand is inelastic • When Erd equals 1, resource demand is unit elastic Least-Cost Combination of Resources • The last dollar spent on each resource yields the same marginal product Least-Cost Combination of Resources Marginal Product Of Labor (MPL) Price of Labor (PL) = Marginal Product Of Capital (MPC) Price of Capital (PC) Optimal Combination of Resources • The Profit-Maximizing Rule • Profit Maximizing Combination of Resources PL = MRPL and MRPL PL = PC = MRPC MRPC PC =1 W 25.2 Practice Problem • Assume that a purely competitive firm uses two resources, labor (L) and capital (C), to produce a product. In which situation would the firm be maximizing profit? MRP MRP P P L A) B) C) D) Answer: C $100 $100 $150 $300 C $200 $200 $200 $400 L $300 $200 $150 $300 C $400 $100 $200 $200 Marginal Productivity Theory of Income Distribution • The idea that the distribution of income is equitable when each unit of resource receives a money payment equal to its marginal contribution to the firm’s revenue • “to each according to what he or she creates” • Each worker contributes as much output as he is paid