McGraw-Hill/Irwin

Chapter 12
The Demand
For Resources

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Chapter Objectives
Resource pricing
Marginal revenue productivity
and firm resource demand
Factors that affect resource
demand
Elasticity of resource demand
Optimal combination of
resources for the competitive
firm
12-2

Resource Pricing
Firms demand resources
Focus on labor

Resource prices are important

Money-income determination
Cost minimization
Resource allocation
Policy issues
12-3

Resource Demand
All markets are competitive
(good and resource)
Derived demand depends on:
Productivity of resource (MP)
Price of good it helps produce (P)

Marginal revenue product (MRP)

Change in TR resulting from unit
change in resource (labor)
12-4

Resource Demand
Rule for employing resources:
MRP = MRC
Marginal Revenue Product (MRP)
Marginal
Revenue
Product

Change in Total Revenue

Unit Change in Resource Quantity

Marginal Resource Cost (MRC)

Marginal
Resource
Cost

Change in Total (Resource) Cost

Unit Change in Resource Quantity
12-5

MRP as Resource Demand

(1)
(2)
(3)
(4)
(5)
(6)
Units of Total Product
Marginal
Product Total Revenue, Marginal Revenue
Resource
(Output)
Product (MP) Price
(2) X (4)
Product (MRP)

0
1
2
3
4
5
6
7

0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28

$2
2
2
2
2
2
2
2

7
6
5
4
3
2
1

$0
14
26
36
44
50
54
56

]
]
]
]
]
]
]

$14
12
10
8
6
4
2

$18

Purely
Competitive
Firms
Demand for
A Resource

Resource Wage
(Wage Rate)

16
14
12
10
8
6
4

D=MRP

2
0
-2

Quantity of Resource Demanded

12-6

MRP as Resource Demand

(1)
(2)
(3)
(4)
(5)
(6)
Units of Total Product
Marginal
Product Total Revenue, Marginal Revenue
Resource
(Output)
Product (MP) Price
(2) X (4)
Product (MRP)

0
1
2
3
4
5
6
7

0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28

$2.80
2.60
2.40
2.20
2.00
1.87
1.75
1.65

7
6
5
4
3
2
1

$ 0.00 ]
18.20 ]
31.20 ]
39.60 ]
44.00 ]
46.25 ]
47.25 ]
46.20

$18.20
13.00
8.40
4.40
2.25
1.00
-1.05

$18

Imperfectly
Competitive
Firms
Demand for
A Resource

Resource Wage
(Wage Rate)

16
14

D=MRP
(Pure Competition)

12
10
8
6
4 D=MRP

(Imperfect

2 Competition)
0
-2

Quantity of Resource Demanded

12-7

Resource Demand
Amount purchased at different
resource prices, all else the same
For the firm, equal to MRP
Market demand equals sum of firm
demand

Downsloping because of DMR

Changes in price for imperfect
competition
12-8

Determinants of
Resource Demand
Changes in product demand
Changes in productivity
Quantities of other resources
Technological advance
Quality of variable resource

12-9

Determinants of
Resource Demand
Changes in the price of
substitute resources
Substitution effect
Output effect
Net effect

Changes in the price of

complementary resources
12-10

Employment Trends
Rising employment
Services
Health care
Computers

Declining employment
Labor saving technological change
Textiles
12-11

Elasticity of Resource Demand

Erd =

Percentage Change in Resource Quantity

Percentage Change in Resource Price

Ease of resource substitutability

Elasticity of product demand
Ratio of resource cost to total
cost
12-12

Optimal Combination of Resources

All resource inputs are variable
Choose optimal combination
Minimize cost of producing a
given output
Maximize profit
12-13

The Least Cost Rule

Minimize cost of producing a given
output
Last dollar spent on each resource
yields the same marginal product
Marginal Product
Of Labor (MPL)
Price of Labor (PL)

Marginal Product
Of Capital (MPC)
Price of Capital (PC)
12-14

Profit Maximizing Rule

MRP of each resource equals
its price
PL = MRPL and
MRPL
PL

PC = MRPC
MRPC
PC

=1
12-15

Income Distribution
Paid according to value of service
Workers
Resource owners

Inequality
Productive resources unequally
distributed

Market Imperfections
12-16

Case of ATMs

Input substitution
Banks use ATMs instead of people
Least-cost combination of resources
ATMs debut about 35 years ago
11 billion U.S. transactions per year
80,000 tellers eliminated1990-2000
Former tellers find new jobs
Customer convenience
12-17

Key Terms

derived demand
marginal product (MP)
marginal revenue product (MRP)
marginal resource cost (MRC)
MRP=MRC rule
substitution effect
output effect
elasticity of resource demand
least-cost combination of resources
profit-maximizing combination of resources
marginal productivity theory of income
distribution
12-18

Next Chapter Preview

Wage
Determination

12-19