Chapter 25
(and a part of 26)
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Money-income determination: resource
prices help determine income of households
Cost minimization: firms base decision off of
resource prices in order to maximize profit
and minimize cost
Resource allocation: firms allocate resources
based on price
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Derived demand: derived from the products that
the resources help produce
Strength of demand depends on productivity of
resource and market value/price of the good
Marginal revenue product=change in total revenue
divided by unit change in resource quantity
Marginal resource cost=change in total cost
divided by unit change in resource quantity
MRP=MRC for profit maximizing
Demand curve: add individual demand curves for
all firms hiring that resource
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Resource demand derived from product
demand and depends on resource
productivity
Quantities of other resources: marginal
product of any resource will vary with
quantities of other resources used with it
Technological advance: better quality of
capital, greater productivity
Quality of variable resource: Improvements
increase marginal productivity and demand
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Substitution effect: change in price of resource
depends on quantity of resource and if they
have substitutes
Output effect: Increase in price of one input will
increase production costs and reduce level of
output
Labor demand will increase when:
-demand for product increases
-productivity increases
-price of substitute input increases
-price of complimentary input decreases
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Changes in labor demand affect wage rates
and employment
-Increase in labor demand: increase in
employment
Fastest growing occupations are in health
care
Computerized equipment has decreased need
for human labor such as meter readers,
telephone operators, and mail clerks
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Ease of Resource Substitutability
◦ The greater the substitutability of other resources,
the more elastic the demand is for a particular
resource (ex: voicemail instead of telephone
receptionist)
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Elasticity of Product Demand
◦ The greater the price elasticity of product demand,
the greater the elasticity of resource demand
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The Least-Cost Rule: the cost of any output is
minimized when the ratios of marginal
product to price of the last units of resources
used are the same for each resource
The Profit-Maximizing Rule: minimizing cost
is not sufficient for maximizing profit, so a
firm will achieve profit-maximization when
each resource is employed to the point at
which its marginal revenue product equals
resource price
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Income gets distributed according to
contribution to society’s output
Some argue that the distribution of income is
too unequal
Market imperfections: because of real-world
market imperfections, wage rates and other
resource prices frequently are not based
solely on contributions to output
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A market in which a single employer of labor
has substantial buying (hiring) power
It will have the following characteristics:
◦ One single buyer of a particular type of labor
◦ This type of labor is relatively immobile, either
geographically or because laborers have to acquire
new skills
◦ “wage maker” because the wage it pays varies
directly with the number of workers it employs
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Monopsonies have an upward-sloping labor
supply to firm
MRC is higher than the wage rate
To maximize profit, the monopsonist will
employ the number of workers where MRC
equals MRP
Monopsonies in the US are very rare, but
professional sports teams are probably the
closest we have