Download The Demand for Resources

THE DEMAND FOR
RESOURCES
RIXIE
AP Microeconomics
Unit 4, Day 1
DERIVED DEMAND
• The demand for the factors of
production is derived from the
goods that they produce.
• The demand for food truck chefs,
food truck raw materials, and
food truck permits exists
because there is demand for
food truck food!
TWO MEASURES TO DETERMINE
RESOURCE USE
MARGINAL REVENUE
PRODUCT (MRP)
MARGINAL RESOURCE
COST (MRC)
• The addition to a firm’s revenue
when an additional input is
employed
• The additional cost to the firm
from hiring an additional input
like a worker or machine
• MRP = Change in Total Revenue
/ Change in # of Inputs
• MRC = Change in Total
Resource Cost / Change in # of
Inputs
• MRP = Marginal Revenue *
Marginal Product
• In a competitive labor market,
MRC = Wage
PROFIT-MAXIMIZING RESOURCE
EMPLOYMENT
• The profit-maximizing employer
should hire to the point where
MRP = MRC
• Or, as close as possible to equal
as long as MRP > MRC
• (Similar to the MR = MC rule in
the product market!)
MARGINAL
UNITS
MARGINAL REVENUE
TOTAL
MARGINAL
OF
REVENUE PRODUCT
PRODUCT PRODUCT
LABOR
(MR = P)
(MRP = MP
x MR)
MARGINAL
RESOURCE
COST
(MRC =
WAGE)
0
0
---
---
---
---
1
25
25
$.50
$12.50
$7.50
2
45
20
.50
10.00
7.50
3
60
15
.50
7.50
7.50
4
70
10
.50
5.00
7.50
5
75
5
.50
2.50
7.50
6
70
-5
.50
-2.50
7.50
7
60
-10
.50
-5.00
7.50
GRAPHICAL PORTRAYAL
(COMPETITIVE WAGE MARKET)
$
Wage
Supply = MRC = Wage
Demand = MRP
Q*
Q
Labor
DETERMINANTS OF RESOURCE
DEMAND
1. Changes in the product demand
• Increased demand for lemonade leads to an
increased price of lemonade
• This increases the MRP of resources, shifting the
demand for those resources to the right, &
increasing the quantity of labor employed
DETERMINANTS OF RESOURCE
DEMAND
2. Changes in productivity
• Increases in efficiency (such as tech advances) can
make a firm more profitable and give an incentive
to employ more resources
DETERMINANTS OF RESOURCE
DEMAND
3. Changes in the prices of other resources
• Substitute resources
• If the price of farm machinery decreases relative to farm laborers, more
machinery would be utilized, decreasing the MRP of farm labor (it
would shift left)
• Complementary resources
• If the price of lumber used to build new houses decreases, more homes
will be built, increasing the demand/MRP for construction workers (it
would shift right)
SHIFT IN RESOURCE DEMAND
$
Wage
Supply = MRC = Wage
D = MRP2
D = MRP1
Q*1
Q*2
Q
Labor
PRACTICE
State whether each of the following will increase or decrease the demand for the
laborers, shift the demand curve to the left or right, and increase or decrease the quantity
of labor employed.
1. The effect of an increase in popularity of gambling on the demand for workers at
casinos
2. The effect of consumers decreasing their demand for food truck meals on the
demand for food truck workers
3. The effect of developments in computer-assisted graphic design on the productivity
of, and demand for, graphic artists
4. The effect of a decline in price of security equipment used by businesses to protect
against illegal entry on the demand for night guards
5. The effect of a decline in price of cell phone equipment on the cost of cell phone
service, and in turn on the demand for cell phone assemblers
ANSWERS
State whether each of the following will increase or decrease the demand for the
laborers, shift the demand curve to the left or right, and increase or decrease the
quantity of labor employed.
1. Increase / Shift Right / Increase (increased price of service – increased
MRP/demand for workers)
2. Decrease / Shift Left / Decrease (decreased price of product – decreased
MRP/demand for workers)
3. Increase / Shift Right / Increase (increased efficiency)
4. Decrease / Shift Left / Decrease (substitute resources)
5. Increase / Shift Left / Increase (complementary resources)
LEAST-COST HIRING RULE
Unit 4, Day 2 intro
(4/5 & 4/6)
RESOURCE MARKET:
LEAST-COST HIRING RULE
• To minimize costs, a firm will adjust
the ratio of inputs until the
marginal product of labor divided
by the price is equal to the
marginal product of capital divided
by price (L is labor & K is capital)
• You will either be given the budget
of the firm to spend on these
resources, or the quantity of
output they need to produce.
MPL
PL
MPK
PK
 Does this sound familiar???
UNITS OF
ROBOTS
EMPLOYED
MPK
(ROBOTS)
MPK
/ PK
UNITS OF
LABOR
EMPLOYED
MPL
(WORKERS)
1
30
1
20
2
20
2
15
3
10
3
10
4
5
4
5
MPL
/ PL
 Each unit of robots costs $10 and each unit of workers costs $5.
The firm has $35 to spend on these resources. Fill in the rest of the
chart, and determine the cost-minimizing combination of resources
to employ.
UNITS OF
CAPITAL
EMPLOYED
UNITS OF
LABOR
EMPLOYED
MPK
MPL
1
100
1
50
2
90
2
40
3
80
3
30
4
60
4
20
5
45
5
10
6
30
6
5
MPK
/ PK
MPL
/ PL
 Each unit of capital costs $10 and each unit of workers costs $5.
The firm needs to produce 360 gadgets with these resources. Fill in
the rest of the chart, and determine the cost-minimizing
combination of resources to employ.