Micro chapter 25- presentation 2 Elasticity

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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
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