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Micro Chapter 12
The Supply of and Demand for
Productive Resources
5 Learning Goals
1) Note the types of productive inputs
2) Construct a demand curve for resources
3) Correlate a resource’s marginal
productivity to the firm’s hiring decision
4) Understand the behavior of resource
5) Apply supply and demand analysis to the
resource market
You may skip the paragraphs addressing
elasticity of demand, elasticity of supply,
and adjusting to dynamic change.
Human and Nonhuman
Anything you do to increase your
knowledge and skills is called investment
in human capital
A brief digression:
Education is an investment good, not a
consumption good
Be careful using CPI in reference
A report on CNN states, “Ten years ago only 16% of the
highest-income families borrowed for college. By 2000 that
had grown to 45 percent.” This should not be surprising,
and it doesn’t indicate that today’s higher-income families
are poverty-stricken. It’s a rational response to changing
costs and benefits. The costs of borrowing to finance a
college education are fairly low today because interest rates
are far below what they were in the 1980s. The returns of
going to college- the return on the investment in human
capital that is represented by time in college and a college
degree- far exceed the costs of borrowing. It makes sense
to borrow when the returns exceed the costs, and that’s just
what students are doing. Students are doing exactly the
right thing given the incentives the market is providing.
Q: If you currently do not have students loans, why not? If
you do, did you borrow the maximum amount? If not, why?
Q12.1 Most millionaires are
college graduates.
1) True
2) False
4 of 5 millionaires are college graduates.
18% of millionaires have Master’s
8% have law degrees.
6% have medical degrees.
6% have Ph.Ds.
Level of Education and Median Income,
2002 (18 Years and Over, All Workers, All
Races, Both Sexes)
Not a HS grad
HS graduate (GED included)
Some college (no degree)
Associate’s degree
Level of Education and Median Income,
2002 (1999 dollars, 25 Years, All Workers,
Both Sexes)
Bachelor’s degree
Master’s degree
Professional degree
Doctoral degree
The Demand for
Why do firms hire people?
The demand for resources is a derived
demand- it is dependent on the demand
for the product
Why is the resource demand curve
downward sloping?
Because of substitutes:
(1) If the price of one resource is high the
firm will want less of that resource; the firm
will find another one that is cheaper
(2) If resource prices are high, the product
price will be high and fewer people will buy
Q12.2 Which of the following most clearly
illustrates the concept of "derived
1) An increase in the price of steak causes the
demand for poultry to increase.
2) An increase in the demand for new houses
leads to an increase in the demand for
construction workers.
3) An increase in consumer income leads to an
increase in the demand for services provided
by the government.
4) An increase in the demand for new cars causes
the demand for used automobiles to rise.
Q12.3 An increase in the price of a
resource would cause
1) producers to substitute other inputs for the
2) consumers to increase consumption of the
goods that increase in price as the result of the
higher resource price.
3) an increase in the demand for products that
use the resource intensely.
4) A reduction in the price of goods produced with
the resource.
Marginal Productivity
and the Firm’s Hiring
More specifically, why do firms hire
If the firm already has 20 employees, why
hire one more?
Because that employee’s marginal
production adds to total production
Example: 20 employees produce 50 units,
21 employees produce 55 units, the
marginal productivity of the 21st worker is 5
From the previous example, what if
those 5 new units sold for $10 each
and the worker cost $40?
Marginal revenue (MR) = $10
Marginal product (MP) = 5
Marginal revenue product (MRP) = $50
Marginal cost (MC) = $40
A new decision rule for the firm: hire
people as long as MRP > MC of worker
Q12.4 Assume that skilled labor costs
twice as much as unskilled labor, a profitmaximizing firm will
1) always hire more skilled labor because it is
more productive
2) always hire more unskilled labor because it is
3) hire until it equalizes the two marginal products
4) hire until the marginal product of unskilled
labor is one-half that of skilled labor
5) hire until the marginal product of unskilled
labor is two times that of skilled labor
Q12.5 A profit-maximizing restaurant owner
will hire more buspersons to keep more
tables clean and quickly available to new
customers, as long as
1) the marginal product of buspersons exceeds
the marginal product of other employees.
2) the hourly wage of buspersons is lower than
that of cashiers and cooks.
3) the marginal revenue product of buspersons
exceeds their wage rate.
4) the wage of buspersons exceeds the wage of
other employees.
Class Activity:
Explain why it might make perfect
economic sense to pay a professional
athlete $20 million per year.
The Supply of Resources
If you were currently working for
$25 an hour, would you be willing
to work more for $30 an hour?
The resource supply curve is upward
sloping: higher wages increase quantity
An individual person would work more OR
more people would be willing to work
when wages increase
Supply, Demand, and
Resource Prices
Now we apply Chapter 3 again
Supply of and demand for resources will
determine an equilibrium wage
Q12.6 If an advance in computer technology
reduces the need for businesses to hire
accountants, students majoring in
accounting should expect
1) a lower rate of return on their human capital
2) an increase in their employment prospects.
3) a higher wage rate than they were expecting
when they selected their major.
4) an increase in the demand for accountants.
S & D graph:
Watch content video: Resource supply
and demand
Q12.6 Which of the following is most likely
to result from an increase in the demand
for computer technicians?
1) an increase in the wages of computer technicians,
which will attract additional technicians in the long
2) an increase in the employment of computer
technicians, which will depress current wage rates
but eventually lead to higher wage rates for
3) a decline in the number of persons preparing
themselves for careers as computer technicians
4) lower wage rates and a shortage of computer
Question Answers:
12.1 = 1
12.2 = 2
12.3 = 1
12.4 = 4
12.5 = 3
12.6 = 1