Resource Market

Rule for Employing resources &

determinants of demand for labor

Rule for Employing

Resources
To max Profit: Firms should hire as long
as each successive unit adds more to
Total Revenue than to firms cost
Marginal
MRC=

Revenue Cost = MRC

Change in total (resource) cost

Change in Resource Quantity

Rule for Employing

Resources
Rule:

produce where MRP=MRC

Similar to MR=MC rule

Difference now focus on inputs not
outputs
When

to hire next worker?

If MRP>MRC
Why? increase revenue

MRP as Demand Schedule

EX:

Perfect Comp.

Firms are wage takers therefore the

resource price (market wage rate) = MRC
MRP

= Demand schedule (Curve)

Why?
Each point indicates the # of workers the
firm would hire at each wage rate.

How many
workers to hire?
If Market Wage
Rate =
$13.95?
1
$11.95?
2
$9.95?
3

Downward sloping curve shows Diminishing

Marginal Returns

Determinants of Resource
Demand

1.

Changes in Product Demand

Increase in Demand for a product =

Increase in Demand for resources used to
make the product

Determinants of Resource
Demand

2.

Changes in Productivity
An increase in productivity of a resource =
increases demand for the resource (increase
to MP and thus to MRP)
How/why?
Increase in Quantity of other resources(extra
land and capital increase productivity, and thus
demand for labor increases)
Technological advances (a worker with a crane is
more productive than a worker with just two hands)
Quality of the variable resource (Laborers that
are healthy and educated are in more demand)

Determinants of Resource
Demand
3. Changes in Price of other resources
Substitutes and Complements
Substitution

effect

If price of a substitute resource decreases

demand for labor decreases
EX: robots in factory (price down), human labor
demand (down)

Complementary Resources

resources -work together (a computer and a

designer)
complementary resource price falls (computer)
Demand for computers increases
Demand for computer designer increases

Output effect
Price of Capital decreases
lower costs of production =
more output
Demand for all resources
increases (including demand for
labor)
Net effect which effect is
greater than other

Elasticity of Resource
Demand
measures

the sensitivity of a firm to

changes in resource prices

Formula:
Erd

= % change in resource qty

% change price
Erd >1 = Elastic
Erd < 1 = Inelastic
Erd = 1 unit elastic

Factors of Elasticity of
Resource Demand
Substitutability
More substitutes = greater elasticity
EX:
receptionist becomes elastic demand
when automated voice systems
introduced
ER surgeon - few substitutes = inelastic
demand

Factors of Elasticity of
Resource Demand
elasticity of product demand
Greater the price elasticity of
product demand, greater the
elasticity of resource demand to
make the product