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Chapter 27 Demand for Economic Resources |
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I. Resource (factor) pricing significance II. Determining resource prices III. Resource demand is "derived" IV. Determining Resources demand |
VII. Elasticity of factor demand
IX. Resource Markets 25 min. Video
Quick Reviews 1-page
per chapter Return to Quick Economics Notes 12/15/19 Please link to and share. |
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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 Competitive 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 (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 |
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2. Imperfectly competitive product
market |
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| 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 | |
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V. Determining factor allocations, which resources
perform which tasks. 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. |
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Price of Labor is $8 |
Price of Capital is $14 |
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| 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 | ||
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Buy 1 machine & 10 people |
Buy 2 machines & 5 people |
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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. 
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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. |
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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. |
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Importance of the resource: resources that represent a high proportion |
 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?
epi.org/publication/10-year-decline-wages-college-graduates/ Answer is in the next few chapters. |
