I. Significance of resource (factor) pricing
A. Factor allocation (land, labor, capital, enterprise) will be analyzed.
B. The combination of "factors" used in production determines
1. economic
efficiency
2. income
distribution among factor owners (rent, wages,
interest, and profit)
II . Determining resource prices
A. Supply and demand is the key mechanism for determining resource prices.
B. This chapter provides an overview of what determines resource demand.
C. Chapter 28 examines the supply and demand for
labor.
D. Chapter 29 examines the supply and demand for land, capital and enterprise.
E. Monopoly interference will come from
1. Big companies
2. Big unions
3. Big governments
4. Big buying groups like
American Association of Retired Persons
III. Resource demand is "derived" from
A. Factor productivity
B. Final product profitability (selling price)
C. A highly productive resource making an expensive, highly
profitable product,
commands the highest factor price.
The idea is to work for a successful
company in an
expanding industry.
IV. Determining resources demand
A. Demand for resources is called marginal revenue product (MRP)
1. Marginal physical product (MPP) is the change in total production
which results from hiring
one more unit of a resource.
2. Marginal revenue product (MRP) is the change in total revenue
which
results from hiring one more unit of a resource
B. Labor will be the variable resource examined.
C. Both competitive and noncompetitive product markets will be analyzed.
1. Perfectly competitive product market
| Unit of
Resource Purchased |
Total
Product
(TP) |
Marginal
Physical Product of Labor |
Selling Price
of
Product Produced (P) |
Total Revenue
(TP x P) |
Marginal
Revenue Product of Labor |
| 1 |
15 |
15 |
3 |
45 |
45 |
| 2 |
27 |
12 |
3 |
81 |
36 |
| 3 |
36 |
9 |
3 |
108 |
27 |
2. Imperfectly competitive product
market
a. Price of
product produced must be lowered to sell more of the product.
b. As a result resource demand is more inelastic.
c. Inelastic
demand for a resource means the purchaser of the resource can maximize profit by
restricting output.
|
|
| Unit of
Resource Purchased |
Total
Product
(TP) |
Marginal
Physical Product of Labor |
Selling Price
of
Product Produced (P) |
Total Revenue
(TP x P) |
Marginal
Revenue Product of Labor |
| 1 |
15 |
15 |
3 |
45 |
45 |
| 2 |
27 |
12 |
2 |
54 |
9 |
| 3 |
36 |
9 |
1 |
36 |
-18 |
D.
Read
the American Production and Inventory Control Society (APICS) and learn how
they true to increase the
the marginal
physical product of resources.
V. Determining factor allocations, which resources to use when performing
some task.
A. Because resources work together,
the optimum proportion of resources to produce a product must be
determined.
1. Optimum proportion is where the
products produced by the factors divided by their price are equal.
|
Price of Labor is $8 |
Price of Capital is $14 |
| Labor Purchased |
MPPL |
Labor Purchased |
MPPL |
1 |
100 |
| 1 |
20 |
6 |
8 |
2 |
50 |
| 2 |
20 |
7 |
6 |
3 |
35 |
| 3 |
20 |
8 |
6 |
4 |
20 |
| 4 |
15 |
9 |
4 |
5 |
16 |
| 5 |
8 |
10 |
2 |
6 |
1 |
2. Beginning with a labor intensive approach, we
add capital until production per dollar of both resources is equal.
|
Buy 1 machine & 10 people
100/$14 > 2/$8
so hire more machines and
less people
|
Buy 2 machines & 5 people
50/$14 > 8/$8
so
hire more machines and less people
|
Buy 3 machines & 3 people
35/$14 = 20/$8
2.5 = 2.5
|
B. Maximum profit is reached when the MRP of resources
is equal to the price paid for said resources.
1. Hiring more of both will increase revenue by more than expenses but with MRP
dropping, eventually hiring more will
lower profit.
2. Hire 6 units of labor and 6 units of capital.
VI. Factor relationships affect demand.
A. When resources are substitutes for each other such as labor and capital,
they compete for investment dollars.
1. An
increase in the productivity of capital will cause the MRP of
capital to increase relative to the MRP
per dollar of
labor.
2. As a
result, capital will be substituted for labor.
3. The
process of substituting more efficient capital for less efficient labor is
called the substitution
effect.
It began in the Stone Age,
accelerated dramatically with the Industrial Revolution and continues to
accelerate today.
4. An
automated welding machine replaces people making welders less valuable.
B. When resources are complements to each other such as labor
and capital, their price and productivity affect each other.
1. A
decrease in the price of capital or an increase in its productivity will cause
the MRP per dollar of capital to increase.
2. This increase in
efficiency will cause total output to increase and with it the demand (MRP) for
all resources including
labor.
3. The process of
increasing the MRP of labor by using capital is called the output
effect. It
began in the Stone Age,
accelerated
dramatically with the Industrial Revolution
and continues to accelerate today.
4. A powered hammer makes
carpenters more productive, less expensive, and increase the value of
carpenters.
VII. Elasticity of factor demand
A.
B. Many factors
affecting resource elasticity of demand
1.
Diminishing return
as the faster diminishing returns begin, the quicker MPP
decreases and the
more inelastic is resource demand.
2. High
elasticity of product demand increases factor elasticity of demand
3.
Number and suitability of substitutes increase elasticity. If
there are suitable resources available to switch to,
firms will
switch rather
than pay more for a given resource.
4.
Importance of the resource: resources that represent a high proportion of a
product's total cost will have
high elasticity of
demand
as the possible cost saving is substantial and the search
for a substitute will be intensive.
5.
Time increases elasticity: given enough time, a substitute for expensive
resources will be found.
VIII. Individual labor supply
|
|
|
People do not work at extremely low wages
because the opportunity cost of leisure, i.e., wages, is
low and it's not worth working.
People begin to substitute work for leisure as wages are
increased as the opportunity cost of leisure
(wages) is greater and greater.
But leisure is a superior good and at some point the
income effect causes people to increase leisure and work
(supply) less even though wages are increased.
As a result, the supply curve will
eventually bend back toward the y-axis.
For more visit
Backward bending supply curve of labor
from
Wikipedia
|
