Economics Notes

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

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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Chapter 27 Demand for Economic ResourcesW
When printing these two pages, use portrait at 70% with minimum margins

Our Current Events Internet Library has an interesting economics section.

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
      F. 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
(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

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
          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 MPP_L Labor Purchased MPP_L 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
                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

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.

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Our Tutors Available 24/7 Accounting Economics Education Marketing Mathematics Statistics Writing Services	Chapter 27 Demand for Economic ResourcesW When printing these two pages, use portrait at 70% with minimum margins Our Current Events Internet Library has an interesting economics section.
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 F. 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 (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

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	MPP_L	Labor Purchased	MPP_L	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.

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	Chapter 27 Class Discussion Questions	Table of Contents
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