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The Supply and Demand
for Productive Resources
Two classes of productive resources:
Non-human resources:
Physical capital
Land
Natural resources
Human resources: (Human capital)
Composed of the skills, knowledge,
and experience of workers.
Goods and Services Markets
Payments $$
.
a. Businesses supply goods & services
b. Receive sales revenue.
c. Households, (investors, governments,
and foreigners) demand goods.
a. Business firms demand resources
Businesses
b. Households supply labor and other
resources
c. in exchange for income.
Resource Markets
Resources
Households
The Demand for Resources
• As a resource price increases,
producers will:
• use substitute resources, or
• face higher costs
These lead to higher prices and
a reduction in consumption.
• At the lower output, firms
use less of the resource that
increased in price.
Resource
price
P2
P1
B
A
• Both contribute to the
inverse relationship between
the price and quantity
demanded of a resource.
D
Q2 Q1
Quantity
Resource Supply
Resource
price
• As a resource’s price increases,
individuals have a greater
incentive to supply it.
• Thus, a positive relationship
will exist between a resource’s
P2
price and the quantity supplied
in the market.
P1
S
B
A
Quantity
Q1 Q2
Equilibrium
Wage
•market demand is downward
(resource price)
sloping, reflecting declining MRP
S
• market supply slopes upward
as higher prices (wages) induce
individuals to supply more.
•price P1 brings the choices of
buyers and sellers into harmony. P1
A
• At equilibrium price P1, the
quantity demanded will just
equal the quantity supplied.
D
Q1
Quantity
Annual Salary
Quantity Demanded
Quantity Supplied
$55,000
45,000
20,000
$60,000
40,000
27,000
$65,000
37,000
31,000
$70,000
35,000
35,000
$75,000
33,000
38,000
$80,000
32,000
41,000
Demand and Supply of Nurses in Minneapolis-St. Paul
Derived Demand for Resources
The demand for resources is
derived from the demand for
the products that the
resources help produce.
A service station hires
mechanics because of
their customers’ demand
for repair services.
Derived Demand for Resources
• The demand for chefs is
dependent on the demand for
restaurant meals.
• The demand for pharmacists
is dependent on the demand for
prescription drugs.
• The demand for attorneys is
dependent on the demand for
legal services.
Other Demand Factors for Labor
1. Education and training:
• Increased education and training increases
output. (Shifts to the right.)
• Increased levels of productivity increase
the demand for these workers.
2. Technology:
• Technology can be a substitute or a
complement to labor.
• If a complement, it increases the demand
for certains types of labor.
• If a substitute, then the demand for labor
decreases. (Shifts to the left.)
Other Demand Factors for Labor
3. Number of companies:
• More businesses, more labor. (Shifts to the
right.)
• Businesses leave, demand drops.
4. Regulations:
• May require specific workers to carry out
certain tasks (Shifts right)
• May eliminate others. (Shifts to the left.)
5. Complementary Resources:
•More trucks require more truck drivers
(Shifts right)
What effect would each of the following tend to have on a
firm’s demand for a particular resource, increase (a)
a or
decrease (b)
b
a. An increase in the demand for the firm’s product ___
b. A decrease in the amounts of all other resources the firm
employs. ____
c. An increase in the productivity of the resource ____
d. An increase in the price of a substitute resource when the
output effect is greater than the substitution effect. _____
e. A decrease in the price of a complementary resource. ___
f. A decrease in the price of a substitute resource when the
substitution effect is greater than the output effect. ___
Other Supply Factors for Labor
1. Number of workers:
• Increased number shifts to the right.
• Policies encouraging immigration will increase
the supply of labor.
2. Required education:
• Keeps the supply of labor lower.
• If a complement, it increases the demand
for certains types of labor.
• If a substitute, then the demand for labor
decreases. (Shifts to the left.)
Other Supply Factors for Labor
3. Government policies:
• Higher qualifications and licensing limit the
supply of labor.
• Maternity leave, unemployment insurance,
and welfare programs may affect long-run
supply of labor.
Supply Positively Related to Price
• The short-run supply elasticity is determined
by how easily the resource can be transferred
from one use to another, or resource mobility.
• If resources are highly mobile then the supply
curve will be elastic even in the short run.
• The supply of a resource will be more elastic in
the long run than the short run.
• In the long run, investment can increase the
supply of both physical and human resources.
Earnings Differences:
Skilled and Unskilled Workers
The wages of unskilled workers are low relative to skilled
workers due to the less demand and large supply of
skilled workers relative to unskilled workers.
Wages
Skilled workers face
strong demand and
small supply relative
to unskilled workers.
Ws
Wu
Ss
Su
Ds
Du
Quantity
Resources Prices
• Determined by supply and demand.
• Changes in the market prices influence the
decisions of both users and suppliers.
• Higher resource prices - more substitutes used.
• Higher resource prices - more of the resource
supplied.
Economic Examples
1. Linkage Between
Labor and Product Markets
An increase (decrease) in resource prices will
reduce (increase) supply in the product market.
An increase in product demand will increase the
demand for resources used in production of the
good.
Resource Prices, and
Product Markets
A reduction in the supply of unskilled labor …
pushes the wage rates of fast-food workers upward.
S2
Price
(wage)
Resources
Market
S1
$7.50
$6.25
DR
Employment
E2 E1
Resource Prices, and
Product Markets
Higher wages cause a reduction in supply.
This leads to higher hamburger prices.
Price
S2
Product
Market
S1
$2.25
$2.00
DP
Q2 Q1
Quantity
Price Controls
A. Price Floors
Price floor is a legally established minimum price
that buyers must pay.
It stops the price from dropping down to
equilibrium level.
Example: minimum wage
The direct effect of a price floor above the
equilibrium price is a surplus: quantity
supplied exceeds quantity demanded.
The Impact of a Price Floor
Price
A price floor like P1 sets a
price above market equilibrium
P1
causing quantity supplied QD …
to exceed quantity demanded QS …
S
Surplus
Price
floor
P0
resulting in a surplus.
Non-price factors will become
more important than prices in
determining where scarce
goods go.
•D
QD
QS
Quantity
Minimum Wage Effects
Direct effect:
Reduces employment of low-skilled labor.
Indirect effects:
Reduction in non-wage component of
compensation.
Less on-the-job training.
May encourage students to drop out of
school
A higher minimum wage does little to help
the poor.
http://www.thedailyshow.com/watch/tue-january-28-2014/wage-against-the-machine
Employment and the Minimum
Wage
If a price (wage) of $7.00
Price
could bring equilibrium.
(wage)
Excess
supply
minimum wage (price floor) of $ 10.00
$10.00 would increase the
earnings of those who stayed
employed (E1), but would reduce
the employment of others.
$ 7.00
S
Minimum
wage level
Those who lose their job (E0 to
E1) would be pushed into either
unemployment or some other
less preferred form of
employment.
D
E1
E0
Quantity
(employment)
2. Increase in the Demand for
Loanable Funds
Interest
rate
Lending
At the interest rate r the
quantity of loanable
funds demanded by
borrowers into equals
quantity supplied by
lenders.
An increase in demand
will move D1 to D2
the interest rises to r2 and
increasing borrowing to Q2
Higher interest rates
encourage additional
savings, making it
possible to fund
more borrowing.
S
r2
r1
Borrowing
D1
Q1 Q2
D2
Quantity of
loanable funds
Interest Rate
Financial Capital Demanded Financial Capital Supplied
(%)
(Borrowing $ billions)
(Lending $ billions)
11
$800
$420
13
$700
$510
15
$600
$600
17
$550
$660
19
$500
$720
21
$480
$750
Demand and Supply for Borrowing Money with Credit Cards
Price Controls
2. Price Ceilings
Price ceiling is a legally established maximum
price that sellers may charge.
It stops the price from rising to the equilibrium
level.
Examples: Usury laws and rent control
The direct effect of a price ceiling is a
shortage: quantity demanded exceeds quantity
supplied.
Example 1: Usury Laws
Interest
rate
In the financial capital
market the price (interest)
I0 would bring the quantity
of capital demanded into
balance with the
quantity supplied.
A price ceiling like I1sets a
price below equilibrium …
quantity demanded QD …
S
Financial
capital market
I0
Rate
ceiling
I1
Shortage
exceeds quantity supplied QS
…
resulting in a shortage.
•D
QS
QD
Quantity of
financial
capital
Example 1: Usury Laws
Interest
rate
A price ceiling like I1sets a
price below equilibrium …
resulting in a shortage.
S
Financial
capital market
I2
However, some states have
set the legal limit above
equilibrium at (interest) I2
I0
This would be an
ineffective price floor
because the rate would not
rise above equilibrium rate
Io.
I1
Rate
ceiling
Shortage
D
QS
QD
Quantity of
financial
capital
Example 2: Rent Control
Price
(rent)
In the rental housing
market the price (rent) P0
would bring the quantity
of rental units demanded
into balance with the
quantity supplied.
A price ceiling like P1sets a
price below equilibrium …
quantity demanded QD …
exceeds quantity supplied QS
…
resulting in a shortage.
S
Rental housing
market
P0
Price
ceiling
P1
Shortage
•D
QS
QD
Quantity of
housing units
Effects of Rent Control
1. The future supply of housing will decline.
2. The quality of housing will deteriorate.
3. Non-price methods of rationing will
increase in importance.
4. Long-term renters will benefit at the
expense of newcomers.
1. The notion that the demand for inputs depends on the
demand for outputs is termed
a. inverse demand.
b. derived demand.
c. proportional demand.
d. complementary demand.
2. If the demand for a consumer good decreases, the demand
for resources required to make the good will
a. increase.
b. remain the same, but the quantity demanded will increase.
c. decrease.
d. increase or decrease depending on whether the demand for
the product is elastic or inelastic.
3. An increase in the demand for a product will cause
a. both the demand for and prices of the resources used to produce the
product to decline.
b. both the demand for and prices of the resources used to produce the
product to increase.
c. the demand for the resources used to produce the product to increase
and their prices to decline.
d. the demand for the resources used to produce the product to decline
and their prices to increase.
4. If the demand for workers with doctorate degrees in
economics increases, we would expect
a. the wages of economists to increase in the short run and the number of
economists employed to increase in the long run.
b. the supply of economists to increase in the short run and their wages to
rise in the long run.
c. a rapid increase in the supply of economists, causing wages to remain
constant.
d. the wages of economists to decrease in the short run and the number of
economists employed to increase in the long run.
5. In a market economy, which of the following is most important if
one is going to achieve high earnings?
a. hard work
b. provision of goods and/or services that others value highly
c. having a graduate degree in a field like history or sociology
d. membership in a labor union
6. “Both buyers and sellers are protected by market competition.
Competition is the great regulator that protects consumers against
high product prices (relative to costs) and productive workers
against low wages.” These statements are
a. essentially true.
b. false; competition protects consumers but cannot protect
workers.
c. false; competition protects workers but cannot protect
consumers.
d. true, when consumer protection organizations are active and labor
unions are powerful; otherwise, it is false.