The Supply and Demand
for Productive Resources
Two classes of productive resources:
Non-human resources:
Physical capital
Land
Natural resources
Human resources: (Human capital)
Composed of the skills, knowledge,
and experience of workers.
Goods and Services Markets
Payments $$
.
a. Businesses supply goods & services
b. Receive sales revenue.
c. Households, (investors, governments,
and foreigners) demand goods.
a. Business firms demand resources
Businesses
b. Households supply labor and other
resources
c. in exchange for income.
Resource Markets
Resources
Households
Derived Demand for Resources
The demand for resources is
derived from the demand for
the products that the
resources help produce.
A service station hires
mechanics because of
their customers’ demand
for repair services.
Demand Inversely Related to Price
Substitution in production:
• If one input becomes more expensive,
producers will shift to lower-cost inputs.
• The better the substitute inputs, the more
elastic the demand for the resource.
Substitution in consumption:
• A high resource prices raises the product
price and consumers substitute other goods.
• The more elastic product’s demand, the
more elastic is the demand for the resource.
The Demand for Resources
• As a resource price increases,
producers will:
• use substitute resources, or
• face higher costs
These lead to higher prices and
a reduction in consumption.
• At the lower output, firms
use less of the resource that
increased in price.
Resource
price
P2
P1
B
A
• Both contribute to the
inverse relationship between
the price and quantity
demanded of a resource.
D
Q2 Q1
Quantity
Time and the Elasticity of
Demand for Resources
• With time, the demand for a
resource becomes more elastic
(Dsr
Dlr):
• the easier it is to switch
to substitute inputs, and/or,
• the more elastic the demand
for the products the resource
helps to produce.
• The long-run demand for a
resource is almost always more
elastic than demand in the
short-run.
Resource
price
P2
C
B
A
P1
Dlr
Dsr
Q3
Q2 Q1
Quantity
Shifting Resource Demand
1. Changes in product demand
- cause the demand for its input resources to
change in the same direction.
2. Changes in the productivity of a resource
- If productivity rises, the demand rises.
3. Changes in the price of related inputs
- The following increase resource demand:
•
•
•
an increase in a substitute input price
a decrease in a complimentary input price
•
•
a decrease in a substitute input price
an increase in a complimentary input price
The following decrease resource demand:
What effect would each of the following tend to have on a
firm’s demand for a particular resource, increase (a)
a or
decrease (b)
b
a. An increase in the demand for the firm’s product ___
b. A decrease in the amounts of all other resources the firm
employs. ____
c. An increase in the productivity of the resource ____
d. An increase in the price of a substitute resource when the
output effect is greater than the substitution effect. _____
e. A decrease in the price of a complementary resource. ___
f. A decrease in the price of a substitute resource when the
substitution effect is greater than the output effect. ___
Hiring Resources
• Hire up to where
Marginal Revenue Product = Resource Price
Marginal revenue product (MRP):
Change in total revenue from the employment
of an additional unit of a resource.
MRP
=
Remember –
Marginal
product
Marginal
revenue
Marginal
product
*
Marginal
revenue
change in output
= change in variable input
=
change in revenue
change in output
Units of
Labor
Total
Output
Marginal
Product
Product
Price
1
14
$5
2
26
$5
3
37
$5
4
46
$5
5
53
$5
6
58
$5
7
62
$5
Total
Revenue
MRP
Units of
Labor
Total
Output
Marginal
Product
Product
Price
Total
Revenue
MRP
1
14
14
$5
70
70
2
26
12
$5
130
60
3
37
11
$5
185
55
4
46
9
$5
230
45
5
53
7
$5
265
35
6
58
5
$5
290
25
7
62
4
$5
310
20
Numbers, Numbers, Numbers
• A firm sells its product for $200 each (4).
• The marginal product (3) shows how output changes
as workers (units of labor) are hired
• The marginal revenue product (6) shows how hiring
an additional worker affects the firm’s total revenue.
Marginal Product
Variable
factor
(1)
0
1
2
3
4
5
6
7
(2)
(3)
(4)
Total Revenue
= (2) * (4)
(5)
0.0
5.0
9.0
12.0
14.0
15.5
16.5
17.0
----5.0
4.0
3.0
2.0
1.5
1.0
0.5
$200
$200
$200
$200
$200
$200
$200
$200
$
0
$1,000
$1,800
$2,400
$2,800
$3,100
$3,300
$3,400
Output
(per week)
=
change in (2)
change in (1)
Price
(per unit)
MRP
= (3) * (4)
---1000
800
600
400
300
200
100
(6)
Demand for Resources
• The MRP curve is the firm’s
short run demand curve for
the resource.
•It slopes downward because
the marginal product of the
resource falls as more of it is
used with a fixed amount of
other resources.
• How will they decide how
many to hire?
Resource
price
Variable
factor MRP
---0
1
1000
2
800
600
3
400
4
5
300
6
200
100
7
1000
800
600
400
200
Quantity
1
2
3
4
5
6
7
Choosing Between Resources
1. Maximize Profits – find the output level where
profits are maximized.
• Deal with each resource independently.
• Hire until:
- MRP labor = Price of labor
- MRP capital = Price of capital
Choosing Between Resources
2. Minimizing the Cost of Production
-check the Marginal Productivity per $
-choose the greater up to desired output.
MP of skilled labor
MP of unskilled labor
=
Price of unskilled labor
Price of skilled labor
=
MP of machine
Price ( rental
value ) of machine
• If MP labor = 15 and Price = $5, then MP/P = 3
• If MP capital = 20 and Price = $5, then MP/P = 4
• use capital
a. What is the least-cost combination of labor and capital to
employ in producing 80 units of output? ____ C and _____ L
b. What is the profit-maximizing combination of capital and
labor for the firm to employ? ___ C ___ L Total output: __
Units of
Capital
MP of
Capital
Units of
Labor
MP of Labor
1
24
1
11
2
21
2
9
3
18
3
8
4
15
4
7
5
9
5
6
6
6
6
4
7
3
7
1
8
1
8
.5
Labor (price = $8)
Capital (price = $12)
Minimize cost of 50 units
of output
Maximize profits
Quan.
Total
Product
Marginal
Product
Total
Revenue
MRP
Quan.
Total
Product
Marginal
Product
Total
Revenue
MRP
0
0
0
$0
$0
0
0
0
$0
$0
1
12
12
24
24
1
13
13
26
26
2
22
10
44
20
2
22
9
44
18
3
28
6
56
12
3
28
6
56
12
4
33
5
66
10
4
32
4
64
8
5
37
4
74
8
5
35
3
70
6
6
40
3
80
6
6
37
2
74
4
7
42
2
84
4
7
38
1
76
2
To maximize profits would you:
(a) increase Capital
(b) increase Labor
(c) keep both the same
(d) increase both
(e) decrease one or both
in the following cases:
a. MRPL
= $8; PL = $4; MRPC = $8, PC = $4.
b. MRPL= $10; PL = $12; MRPC = $14, PC = $9.
c. MRPL = $6; PL = $6; MRPC = $12, PC = $12.
d. MRPL = $22; PL = $26; MRPC = $16, PC = $19
Supply Positively Related to Price
• The short-run supply elasticity is determined
by how easily the resource can be transferred
from one use to another, or resource mobility.
• If resources are highly mobile then the supply
curve will be elastic even in the short run.
• The supply of a resource will be more elastic in
the long run than the short run.
• In the long run, investment can increase the
supply of both physical and human resources.
Resource Supply
Resource
price
• As a resource’s price increases,
individuals have a greater
incentive to supply it.
• Thus, a positive relationship
will exist between a resource’s
P2
price and the quantity supplied
in the market.
P1
S
B
A
Quantity
Q1 Q2
Time and Resource Supply Elasticity
• The supply of CPA services for
example
Resource
price
• If CPA wages increase from P1 to
P2, the short-run response will be
an increase in CPA services from
Q1 to Q2. Some CPAs work more
and some come out of retirement.
P2
• Given time, supply of the resource
(CPAs) becomes more elastic.
(Ssr
Slr) as more individuals
P1
choose this field of training.
S
Slr
B
C
A
• At the higher wage P2, Q3 CPA
services are supplied to the market.
• The long-run supply of a resource
is almost always more elastic than
short-run supply.
Quantity
Q1 Q2 Q3
Supply
Demand
and
Resource Prices
Resources Prices
• Determined by supply and demand.
• Changes in the market prices influence the
decisions of both users and suppliers.
• Higher resource prices - more substitutes used.
• Higher resource prices - more of the resource
supplied.
Equilibrium
Wage
•market demand is downward
(resource price)
sloping, reflecting declining MRP
S
• market supply slopes upward
as higher prices (wages) induce
individuals to supply more.
•price P1 brings the choices of
buyers and sellers into harmony. P1
A
• At equilibrium price P1, the
quantity demanded will just
equal the quantity supplied.
D
Q1
Quantity
The Coordinating Function
of Resource Prices
• Changes in resource prices in response to
changing market conditions are essential for
efficient allocation of resources.
• Profit is a reward for entrepreneurs who are
able to see and act on opportunities to put
resources to higher valued uses.
Adjusting to Dynamic Change
• An increase in demand for housing (product market) … leads
to an increase in demand for electricians (resource market).
• In the product market, the equilibrium price and output of
houses both rise (to P2 and Q2).
• In the resource market, the equilibrium price and output of
electrician services will increase substantially (to P2 and Q2).
Product
Market
Price
Ssr
Price
(wage)
Resource
Market
S
P2
P2
P1
P1
D2
D1
Q1
Q2
D2
D1
Quantity
Q1 Q2
Quantity
Adjusting to Dynamic Change
• This significant increase in price and modest increase in
output is a characteristic of the highly inelastic nature of
the short-run supply of the skilled electrician’s labor.
• The higher resource price will attract new human capital
investments and, with time, the resource supply curve will
become more elastic, moderating the resource price (to P3)
and increasing its quantity supplied (to Q3).
Product
Market
Price
Price
(wage)
Ssr
Resource
Market
Slr
S
P2
P2
P3
P1
P1
D2
D1
Q1
Q2
D2
D1
Quantity
Q1 Q2 Q3
Quantity
The 10 Fastest Growing US Occupations in
Percentage Terms, 2000-2010
Occupation
Computer software engineer,
applications
Computer support specialists
Computer software engineers,
systems
Computer systems administrators
Data communication analysts
Desktop publishers
Database administrators
Personal and home care aides
Computer system analysts
Medical assistants
Thousand Jobs Percentage
2000
2010
Increase
380
760
100%
506
317
996
601
97
90
229
119
38
106
414
431
329
416
211
63
176
672
689
516
82
77
66
66
62
60
57
The 10 Most Rapidly Declining US
Occupations in Percentage Terms,
2000-2010 Thousand Jobs Percentage
Occupation
Railroad brake, signal, and switch
operators
Shoe machine operators
Telephone operators
Radio mechanics
Loan interviewers
Motion picture projectionists
Meter readers
Rail track layers
Farmers and ranchers
Shoe and leather workers
2000
22
2010
9
Increase
-59%
9
54
7
139
11
49
12
1294
19
4
35
5
101
8
36
9
965
15
-56
-35
-29
-27
-27
-27
-25
-25
-21
1. The demand curve for a human resource will be more elastic
the
a. more and better substitutes are available for it.
b. more difficult it is to substitute other resources for it.
c. more inelastic the demand for the product the resource is
used to produce.
d. shorter the time period under consideration.
2. If skilled labor is three times the cost of unskilled labor, a profitmaximizing firm will vary the quantity of each type of labor until the
a. marginal product of each is the same.
b. amount of unskilled labor used is three times the quantity of skilled
labor used.
c. amount of unskilled labor used is one-third the quantity of skilled labor
used.
d. marginal product of unskilled labor is one-third that of skilled labor.
3. The notion that the demand for inputs depends on the
demand for outputs is termed
a. inverse demand.
b. derived demand.
c. proportional demand.
d. complementary demand.
4. What concept implies that a firm’s MRP curve for labor will
slope downward in the short run?
a. diminishing marginal returns
b. the law of supply
c. the law of decreasing cost
d. the price equalization
principle
5. Which one of the following labor resources will likely have
the most inelastic supply schedule in the short run?
a. filling station attendants
b. sales clerks
c. construction laborers
d. dentists
6. Suppose the United Auto Workers’ Union succeeded in obtaining a 10
percent increase in the wages of its workers and that the wage increase
caused automobile prices to rise. Employment in the auto industry would be
most likely to decline significantly if
a. the demand for American-made automobiles was highly elastic.
b. the supply of foreign-produced automobiles was highly inelastic.
c. American consumers considered foreign automobiles a poor substitute
for American automobiles.
d. the demand for American automobiles was relatively constant and highly
inelastic.
7. If the demand for a consumer good decreases, the demand for
resources required to make the good will
a. increase.
b. remain the same, but the quantity demanded will increase.
c. decrease.
d. increase or decrease depending on whether the demand for the product
is elastic or inelastic.
The following chart indicates the reductions in total losses due to
theft if a jewelry store hires additional security guards.
Number
Dollar Value of
of Guards
Thefts Prevented
1
150
2
250
3
340
4
420
5
490
6
540
8. If the security guards can be hired for $75 per day, how many
guards should the shop hire?
a. 2
b. 3
c. 4
d. 5
e. 6
9. An increase in the demand for a product will cause
a. both the demand for and prices of the resources used to produce the
product to decline.
b. both the demand for and prices of the resources used to produce the
product to increase.
c. the demand for the resources used to produce the product to increase
and their prices to decline.
d. the demand for the resources used to produce the product to decline
and their prices to increase.
10. If the demand for workers with doctorate degrees in
economics increases, we would expect
a. the wages of economists to increase in the short run and the number of
economists employed to increase in the long run.
b. the supply of economists to increase in the short run and their wages to
rise in the long run.
c. a rapid increase in the supply of economists, causing wages to remain
constant.
d. the wages of economists to decrease in the short run and the number of
economists employed to increase in the long run.