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Chapter 27 Demand for Economic ResourcesW
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Our Current Events Internet Library has an interesting economics section.

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  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
         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 
Check out AP Microeconomics Review Material!
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.
      D. Jobless Recoveries and the Disappearance of Routine Occupations,  from Global Economic Intersection  11/12

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. Economics in 60 seconds provides a preview.
          1. Video on Comparing Perfectly Competative Product and Resource Markets Review
          2. Econ Concepts in 60 Seconds: Calculating MRP and MRC Review in purely competitive product and factor markets.
      C. Labor will be the variable resource examined.
      D. Both competitive and noncompetitive product markets will be analyzed.
          1. Perfectly competitive product market
Unit of Resource Purchased Total Product 
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 
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

E.  Read the American Production and Inventory Control Society (APICS) and learn how they true to increase the the marginal physical product of resources. 

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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
          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 equa

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 
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

       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

Why is productivity is up much more than wages?


Answer is in the next few chapters.

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