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The Demand for Resources

The Demand for Resources. CIRCULAR FLOW MODEL. $ COSTS. $ INCOMES. RESOURCE MARKET. RESOURCES. INPUTS. BUSINESSES. HOUSEHOLDS. GOODS & SERVICES. GOODS & SERVICES. PRODUCT MARKET. $ REVENUE. $ CONSUMPTION. RESOURCE PRICING. Firms demand resources

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The Demand for Resources

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  1. The Demand for Resources

  2. CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

  3. RESOURCE PRICING • Firms demand resources • Land, labor, capital, & entrepreneurs • Focus on labor

  4. RESOURCE DEMAND • Derived demand • Resource demand is derived from product demand • Demand depends on • Productivity of resource (MP) • Price of product being made (P)

  5. ΔTotal (Resource) Cost MRC Δ Resource Quantity Δ Total Revenue = = MRP Δ Resource Quantity RESOURCE DEMAND Marginal Revenue Product (MRP) Marginal Resource Cost(MRC)

  6. Resource Demand Optimal solution: MRP = MRC

  7. Total Product (Output) Marginal Product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue ] ] ] ] ] ] Consider the case of resource demand under Perfect Competition ] ] ] ] ] ] W 14 12 10 8 6 4 2 Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded MRP AS A DEMAND SCHEDULE Perfect Competition 0 0 $2 $ 0

  8. MRP AS A DEMAND SCHEDULE Perfect Competition Total Product (Output) Marginal Product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 0 1 0 7 $2 2 $ 0 14 ] ] $ 14 7 ] ] ] ] ] ] ] ] ] ] W 14 12 10 8 6 4 2 Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

  9. MRP AS A DEMAND SCHEDULE Perfect Competition Total Product (Output) Marginal Product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 0 1 2 0 7 13 $2 2 2 $ 0 14 26 ] ] $ 14 12 7 6 ] ] ] ] ] ] ] ] ] ] W 14 12 10 8 6 4 2 Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

  10. MRP AS A DEMAND SCHEDULE Perfect Competition Total Product (Output) Marginal Product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 0 1 2 3 0 7 13 18 $2 2 2 2 $ 0 14 26 36 ] ] $ 14 12 10 7 6 5 ] ] ] ] ] ] ] ] ] ] W 14 12 10 8 6 4 2 Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

  11. MRP AS A DEMAND SCHEDULE Perfect Competition Total Product (Output) Marginal Product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 $2 2 2 2 2 2 2 2 $ 0 14 26 36 44 50 54 56 ] ] $ 14 12 10 8 6 4 2 7 6 5 4 3 2 1 ] ] ] ] ] ] ] ] ] ] W 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

  12. Now, consider the case of resource demand under Imperfect Competition MRP AS A DEMAND SCHEDULE Perfect Competition Total Product (Output) Marginal Product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 $2 2 2 2 2 2 2 2 $ 0 14 26 36 44 50 54 56 ] ] $ 14 12 10 8 6 4 2 7 6 5 4 3 2 1 ] ] ] ] ] ] ] ] ] ] W 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

  13. MRP AS A DEMAND SCHEDULE Imperfect Competition Total Product (Output) Marginal Product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 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 1.85 1.75 1.65 $ 0 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 7 6 5 4 3 2 1 ] ] ] ] ] ] ] ] ] ] W 14 12 10 8 6 4 2 The imperfectly Competitive seller’s demand for a resource Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

  14. MRP AS A DEMAND SCHEDULE Imperfect Competition Total Product (Output) Marginal Product (MP) Marginal Revenue Product (MRP) Units of Resource Product Price Total Revenue 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 1.85 1.75 1.65 $ 0 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 7 6 5 4 3 2 1 ] ] More Inelastic Than PC ] ] ] ] ] ] ] ] W 14 12 10 8 6 4 2 The imperfectly Competitive seller’s demand for a resource Q 0 1 2 3 4 5 6 7 8 Quantity of resource demanded

  15. Optimal Combination of Resources • All resource inputs are variable • Choose an optimal combination • Minimize cost • Maximize profit

  16. MP of Labor (MPL) MP of Capital (MPC) = Price of Capital (PC) Price of Labor (PL) The Least Cost Rule • Minimize cost of producing a given output • Last dollar spent on each resource yields the same marginal product

  17. PL = MRPL PC = MRPC and MRPL MRPC = 1 = PL PC Profit Maximizing Rule MRP of each resource equals its price

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