Resource Demand
Resource Demand
• An increase in the demand for a product will
increase the demand for a resource used in
its production
• A decrease in product demand will decrease
the demand for that resource
Changes in Productivity
• Three ways to alter the productivity of any
resource:
1. Quantities of other resources
2. Technological advance
3. Quality of the varied resource
Demand Curves to Shift
1. Changes in prices of goods
2. Changes in supply of other factors
3. Changes in technology
1. Changes in prices of goods
• Factor Demand = Derived Demand
• P X MPL
Shifts of the Value of the Marginal Product Curve
(a) An Increase in the Price of Wheat
Wage
rate
(b) A Decrease in the Price of Wheat
Wage
rate
Market
wage $200
rate
A
C
B
A
$200
MPL
MPL
MPL
2
MPL
1
0
5
8
0
Quantity of labor
(workers)
2
1
3
5
Quantity of labor
(workers)
2. Changes in supply of other factors
• George and Martha acquire more land!
• Each worker now produces more wheat
because they have more land to work with
• What happens to the Marginal Product of
Labor?
• MPL will rise at any given level of
employment
Shifts of the Value of the Marginal Product Curve
(a) An Increase in the Price of Wheat
Wage
rate
(b) A Decrease in the Price of Wheat
Wage
rate
Market
wage $200
rate
A
C
B
A
$200
MPL
MPL
MPL
2
MPL
1
0
5
8
0
Quantity of labor
(workers)
2
1
3
5
Quantity of labor
(workers)
3. Changes in technology
• Improved technology can increase or reduce
demand for a given factor of production
• How can technological producer reduce
factor demand?
– Ex. Horses and Transportation Revolution
• Usual effect of technological progress is to
increase demand for a given factor
Changes in the Prices of Other Resources
Relationship
of
Inputs
Substitutes in
Production
Increase in the Price of Capital
Substitution
Effect
Output
Effect
•Labor
•Production costs up,
substituted for
output down, and
capital
less of both capital
and labor used
Combined
Effect
•DL increases if the
substitution effect
exceeds the output
effect
•DL decreases if the
output effect exceeds
the substitution effect
Complements in
Production
•No
•Production costs up,
substitution of
output down, and
labor for
less of both capital
capital
and labor used
•DL increases
Elasticity of Resource Demand
• Measures the extent to which producers change
the quantity of a resource they hire when its
price changes
(Erd) Elasticity of
% change in resource quantity
Resource Demand =
% change in resource price
• Erd > 1 = resource demand is elastic
• Erd < 1 = resource demand is inelastic
• Erd = 1 = resource demand is unit-elastic
Elasticity of Resource Demand
• Sustainability is a fundamental determinant
of elasticity
• The greater the sustainability of other
resources, the more elastic is the demand for
a particular resource
Elasticity of Resource Demand
• Demand for labor is a derived demand, the
elasticity of the demand for the output that
the labor is producing will influence the
elasticity of the demand for labor
• Greater the price elasticity of product
demand, the greater the elasticity of resource
demand
Optimal Combination of
Resources
• What combination of resources a firm will
choose when ALL its inputs are variable?
• What combination of resources will minimize
costs at a specific level of output?
– Least-cost combination of resources
– The last dollar spend on each resource yields that
same MP
Marginal Product of Labor
(MPL)
Price of Labor (PL)
=
Marginal Product of Capital
(MPC)
Price of Capital (PC)
Optimal Combination of
Resources
• Profit-Maximizing combination of resources
is when each resource is employed to the
point at which its marginal revenue product
equals its resource price
• Labor – PL = MRPL
• Capital – PC = MRPC
Resource Demand Notes
Resource Demand
• A decrease in product demand will decrease
the demand for that resource
Changes in Productivity
• Three ways to alter the productivity of any
resource:
Demand Curves to Shift
1. Changes in _________________
2. Changes in _________________
3. Changes in _________________
1. Changes in prices of goods
• Factor Demand = _______________
• P X MPL
Shifts of the Value of the Marginal Product Curve
(a) An Increase in the Price of Wheat
Wage
rate
(b) A Decrease in the Price of Wheat
Wage
rate
Market
wage $200
rate
A
C
B
A
$200
MPL
MPL
MPL
2
MPL
1
0
5
8
0
Quantity of labor
(workers)
2
1
3
5
Quantity of labor
(workers)
2. Changes in supply of other factors
• George and Martha acquire more land!
• Each worker now produces more wheat
because they have more land to work with
• What happens to the Marginal Product of
Labor?
Shifts of the Value of the Marginal Product Curve
(a) An Increase in the Price of Wheat
Wage
rate
(b) A Decrease in the Price of Wheat
Wage
rate
Market
wage $200
rate
A
C
B
A
$200
MPL
MPL
MPL
2
MPL
1
0
5
8
0
Quantity of labor
(workers)
2
1
3
5
Quantity of labor
(workers)
3. Changes in technology
• Improved technology can increase or reduce
demand for a given factor of production
• How can technological producer reduce
factor demand?
Changes in the Prices of Other Resources
Relationship
of
Inputs
Substitutes in
Production
Increase in the Price of Capital
•Labor
•Production costs up,
substituted for
output down, and
capital
less of both capital
and labor used
•DL increases if the
substitution effect
exceeds the output
effect
•DL decreases if the
output effect exceeds
the substitution effect
Complements in
Production
•No
•Production costs up,
substitution of
output down, and
labor for
less of both capital
capital
and labor used
•DL increases
Elasticity of Resource Demand
• Measures the extent to which producers change
the quantity of a resource they hire when its
price changes
(Erd) Elasticity of
Resource Demand =
• Erd > 1 = resource demand is _________
• Erd < 1 = resource demand is _________
• Erd = 1 = resource demand is _________
Elasticity of Resource Demand
• Sustainability is a fundamental determinant
of elasticity
Elasticity of Resource Demand
• Demand for labor is a derived demand, the
elasticity of the demand for the output that
the labor is producing will influence the
elasticity of the demand for labor
• Greater the price elasticity of product
demand, the greater the elasticity of resource
demand
Optimal Combination of
Resources
• What combination of resources a firm will
choose when ALL its inputs are variable?
• What combination of resources will minimize
costs at a specific level of output?
– Least-cost combination of resources
– The last dollar spend on each resource yields that
same MP
=
Optimal Combination of
Resources
• Profit-Maximizing combination of resources
is when each resource is employed to the
point at which its marginal revenue product
equals its resource price
• Labor – ____ = ____
• Capital – ____ = ____