Chapter 12
The Supply of and Demand for
Productive Resources
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Overview
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The demand for productive resources
The supply of productive resources
Equilibrium in the resource market
Marginal Revenue Product (MRP)
Value Marginal Product (VMP)
Profit maximization and cost minimization
when multiple resources are used
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Demand for Resources
The demand for resources is downward
sloping.
As price increases:
1. Producers will turn to substitute goods
2. Consumers will buy less of the products
that the resource makes
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Elasticity of Resource Demand
Resource demand will be more elastic:
1. The more substitutes the resource has
2. The greater the elasticity of the product
that the resource makes
3. In the Long Run
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Supply of Resources
The supply of resources is upward sloping
because:
As the price of a specific resource increases,
the incentive of potential suppliers to
provide the resource increases
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Equilibrium!
The price and quantity of resources will
move toward the market equilibrium.
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Shifters of Resource Demand
1. A shift in the demand for a product will
cause a shift in the demand for the
resources used to make that product
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Shifters of Resource Demand
2. Changes in the productivity of a resource
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Shifters of Resource Demand
3. Changes in the price of a related
resource.
A. Substitutes
B. Compliments
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Marginal Revenue Product (MRP)
The change in total revenue of a firm that
results from the employment of one
additional unit of a resource.
MRP = Marginal Revenue x Marginal Product
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Value Marginal Product (VMP)
The marginal product of a resource
multiplied by the selling price of the
product it helps produce
VMP = Price x Marginal Product
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Price Takers vs. Price Searchers
For Price Takers: VMP = MRP
For Price Searchers: VMP > MRP
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Cost Minimization
Factors of production will be employed such
that the marginal product per last dollar
spent on each factor is the same for all
factors
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Review
1.
2.
3.
4.
5.
Understand the demand side of the resource
market
Understand the supply side of the resource
market
Understand the market equilibrium
Know what MRP and VMP is and how they
relate to price takers and price searchers
Understand the concept of cost minimization
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