Chapter 15 : The Demand for Resources Resources Pricing Chapter 15 : The Demand for Resources
Resources Pricing
− Resource prices are a major factor in determining the income of households.
− To firms, resource prices represent costs.
− To make the most money, firms must produce at the profit-maximizing output with
the least costly combination of resources.
− Resource prices help in the allocation of resources among the various industries
and firms that need them.
− Many policy issues are grounded on resource pricing
Resource prices are important
1. Money-income determination
2. Cost minimization
3. Resource allocation
4. Policy issues
Resource Demand as a “Derived Demand”
- Why firms need resources?
Because the firms need to produce goods or provide services.
- Why the firms need to produce goods or provide services?
Because there is the demand for goods and services in the market.
- That’s why Resource demand is a derived demand.
Resources Demand
- Rule for employing resources:
* Marginal Revenue Product (MRP)
Marginal
Revenue
Product
=
Change in Total Revenue
Unit Change in Resource Quantity
* Marginal Resource Cost (MRC)
Marginal
Resource
Cost
Change in Total (Resource) Cost
=
Unit Change in Resource Quantity
Determinants of Resource Demand
1. Changes in product demand
- Increase in demand for products leads to increase in demand for resources
2. Changes in productivity
- Increase in productivity leads to increase in demand for resources. (MP increases
so MRP increases)
- Quantities of other resources
* High quantities of capital and land leads to high demand for labor
- Quality of the variable resource
Occupational Employment Trends
* Rising employment
- Services
- Health care
- Computers
* Declining employment
- Labor saving technological change
- Textiles
Elasticity of Resource Demand
Erd =Percentage Change in Resource Quantity
Percentage Change in Resource Price
NOTE : A change in the demand of a resource must be distinguished from a change in the
quantity demanded of a resource.
: The sensitivity of resource quantity to changes in resource prices along a fixed
resource demand curve is measured in the elasticity of resource demand which is
measured as the percentage change in the resource quantity divided by the percentage
change in the resource price.
Factors that determine the elasticity of resource demand
- Ease of resource substitutability
The greater the substitutability of other resources, the more elastic the
demand will be for a particular resource.
- Elasticity of product demand
Since the demand for labor is a derived demand, the elasticity of the demand for the
output product will also influence the elasticity of the demand of labor.
- Ratio of resource cost to total cost
The larger the proportion of total production costs accounted for by a resource, the
greater the elasticity of demand will be for that resource.
Optimal Combination of Resources
- All resource inputs are variable (in the LR)
- Choose the optimal combination
* Minimize cost of producing a given output
* Maximize profit
The Least Cost Rule
- Minimize cost of producing a given output
A producer’s least-cost rule is analogous to the consumer’s utility-maximizing rule.
- Last dollar spent on each resource yields the same marginal product
Marginal Product
Of Labor (MPL)
Price of Labor (PL)
=
Marginal Product
Of Capital (MPC)
Price of Capital (PC)
Profit Maximizing Rule
− MRP of each resource equals its resource price (MR = MC or MRP = P)
− PL = MRPL and PC = MRPC
− MRPL = MRPC = 1
PL
PC
Income Distribution
- Income is distributed according to contribution to society’s output. Income payments
based on marginal revenue product provide a fair and equitable distribution of society’s
income.
- Paid according to value of service
Workers
Resource owners
- It is not a perfect system, however, as it can result in a highly unequal distribution. This
may be because production resources were unequally distributed in the first place.
- Market imperfections can also result in unequal distributions. In some labor markets,
Optimal Combination of Resources
- All resource inputs are variable (in the LR)
- Choose the optimal combination
* Minimize cost of producing a given output
* Maximize profit