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Resource Demand

Resource Demand. Resource Demand. An increase in the demand for a product will increase the demand for a resource used in its production A decrease in product demand will decrease the demand for that resource. Changes in Productivity. Three ways to alter the productivity of any resource:

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Resource Demand

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  1. Resource Demand

  2. Resource Demand • An increase in the demand for a product will increase the demand for a resource used in its production • A decrease in product demand will decrease the demand for that resource

  3. Changes in Productivity • Three ways to alter the productivity of any resource: • Quantities of other resources • Technological advance • Quality of the varied resource

  4. Demand Curves to Shift • Changes in prices of goods • Changes in supply of other factors • Changes in technology

  5. 1. Changes in prices of goods • Factor Demand = Derived Demand • P X MPL

  6. Shifts of the Value of the Marginal Product Curve (a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat Wage rate Wage rate C A A B Market wage rate $200 $200 MPL 1 MPL MPL 3 2 MPL 1 0 5 8 0 2 5 Quantity of labor (workers) Quantity of labor (workers)

  7. 2. Changes in supply of other factors • George and Martha acquire more land! • Each worker now produces more wheat because they have more land to work with • What happens to the Marginal Product of Labor? • MPL will rise at any given level of employment

  8. Shifts of the Value of the Marginal Product Curve (a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat Wage rate Wage rate C A A B Market wage rate $200 $200 MPL 1 MPL MPL 3 2 MPL 1 0 5 8 0 2 5 Quantity of labor (workers) Quantity of labor (workers)

  9. 3. Changes in technology • Improved technology can increase or reduce demand for a given factor of production • How can technological producer reduce factor demand? • Ex. Horses and Transportation Revolution • Usual effect of technological progress is to increase demand for a given factor

  10. Changes in the Prices of Other Resources

  11. Elasticity of Resource Demand • Measures the extent to which producers change the quantity of a resource they hire when its price changes • Erd > 1 = resource demand is elastic • Erd < 1 = resource demand is inelastic • Erd = 1 = resource demand is unit-elastic

  12. Elasticity of Resource Demand • Sustainability is a fundamental determinant of elasticity • The greater the sustainability of other resources, the more elastic is the demand for a particular resource

  13. Elasticity of Resource Demand • Demand for labor is a derived demand, the elasticity of the demand for the output that the labor is producing will influence the elasticity of the demand for labor • Greater the price elasticity of product demand, the greater the elasticity of resource demand

  14. Optimal Combination of Resources • What combination of resources a firm will choose when ALL its inputs are variable? • What combination of resources will minimize costs at a specific level of output? • Least-cost combination of resources • The last dollar spend on each resource yields that same MP

  15. Optimal Combination of Resources • Profit-Maximizing combination of resources is when each resource is employed to the point at which its marginal revenue product equals its resource price • Labor – PL = MRPL • Capital – PC = MRPC

  16. Resource Demand Notes

  17. Resource Demand • A decrease in product demand will decrease the demand for that resource

  18. Changes in Productivity • Three ways to alter the productivity of any resource:

  19. Demand Curves to Shift • Changes in _________________ • Changes in _________________ • Changes in _________________

  20. 1. Changes in prices of goods • Factor Demand = _______________ • P X MPL

  21. Shifts of the Value of the Marginal Product Curve (a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat Wage rate Wage rate C A A B Market wage rate $200 $200 MPL 1 MPL MPL 3 2 MPL 1 0 5 8 0 2 5 Quantity of labor (workers) Quantity of labor (workers)

  22. 2. Changes in supply of other factors • George and Martha acquire more land! • Each worker now produces more wheat because they have more land to work with • What happens to the Marginal Product of Labor?

  23. Shifts of the Value of the Marginal Product Curve (a) An Increase in the Price of Wheat (b) A Decrease in the Price of Wheat Wage rate Wage rate C A A B Market wage rate $200 $200 MPL 1 MPL MPL 3 2 MPL 1 0 5 8 0 2 5 Quantity of labor (workers) Quantity of labor (workers)

  24. 3. Changes in technology • Improved technology can increase or reduce demand for a given factor of production • How can technological producer reduce factor demand?

  25. Changes in the Prices of Other Resources

  26. Elasticity of Resource Demand • Measures the extent to which producers change the quantity of a resource they hire when its price changes • Erd > 1 = resource demand is _________ • Erd < 1 = resource demand is _________ • Erd = 1 = resource demand is _________

  27. Elasticity of Resource Demand • Sustainability is a fundamental determinant of elasticity

  28. Elasticity of Resource Demand • Demand for labor is a derived demand, the elasticity of the demand for the output that the labor is producing will influence the elasticity of the demand for labor • Greater the price elasticity of product demand, the greater the elasticity of resource demand

  29. Optimal Combination of Resources • What combination of resources a firm will choose when ALL its inputs are variable? • What combination of resources will minimize costs at a specific level of output? • Least-cost combination of resources • The last dollar spend on each resource yields that same MP

  30. Optimal Combination of Resources • Profit-Maximizing combination of resources is when each resource is employed to the point at which its marginal revenue product equals its resource price • Labor – ____ = ____ • Capital – ____ = ____

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