Chapter Focus
1.
How businesses maximize profits by choosing how much of each economic resource to use

Based on the marginal productivity theory that businesses use resources based on how much extra profit these resources provide

The profit-maximizing rule that states that a business should use a resource to the point where marginal revenue product equals marginal resource cost (MRP = MRC)

MRP = ∆ TR MRC = Wages OR ∆ Total Labour Cost
∆ Labour ∆ Labour Supplied

Business choose how much of each economic resource to use based upon the combination of the resource’s MRP and MRC
2.
The demand for resources by businesses that are price-takers and price-makers in the markets in which they sell their products

Demand for resources is determined indirectly since resources are used to produce final goods and services
 MRP curve represents the business’s resource demand curve

Product and resource price-taker

a market with many buyers and sellers therefore no effect on the price of resource

Product price-maker, but resource price-taker

most common scenario

Product and resource price-maker (monopsonist)

very unusual, but does occur in small, isolated communities

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3.
The supply of labour, how wage rates are determined, and labour market equilibrium

Resource price-taker

the marginal resource cost curve represents the business’s labour supply curve  perfectly elastic therefore horizontal

Wage rates are determined by the entire industry labour market demand and supply

Labour market equilibrium occurs where labour market demand equals labour market supply

Labour market equilibrium determines wage rates and the number of workers in an industry
4.
Factors that change resource demand

Changes in product demand

Changes in other resource prices

complementary resources, substitute resources

Technological innovation
5.
Price elasticity of resource demand and the factors that determine it
 Price elasticity of resource demand indicates the responsiveness of businesses using a resource to variations in it’s price i) rate of decline of its marginal product

MP declines fast then higher
inelasticity / MP declines slow than higher elasticity ii) price elasticity of product demand

higher elasticity / inelasticity of
product demand then higher elasticity / inelasticity of resource demand iii) proportion of total costs

higher / lower proportion = more / less elastic iv) substitute resources

more / less substitutes = more / less elastic