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Micro
McEachern
ECON 2008-2009
11
CHAPTER
Resource Markets
Designed by
Amy McGuire, B-books, Ltd.
Chapter 11
Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved
1
Demand and Supply
of Resources
 Resource demand
 Firms demand resources
 As long as MR>MC
 To maximize profit
 Resource supply
 People supply resources
 To the highest-paying alternative
 To maximize utility
LO1
Chapter 11
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LO2 Exhibit 1
Dollars per hour of labor
Resource Market for Carpenters
S
W
D
0
E
Hours of labor per period
The intersection of the upward-sloping supply curve of carpenters with the downward-sloping
demand curve determines the equilibrium wage, W, and the level of employment, E.
Chapter 11
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3
The Market Demand for
Resources
 Resource demand
 Derived demand
 Arises from the demand
for the final product
 Market demand
 Sum of demands
for a resource
 In all its uses
 Downward sloping
LO2
Chapter 11
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Shifts of the Demand Curve
 As price falls, producers
 More willing to buy
 Relatively
cheaper
 Substitution in
production
 Greater ability to buy
 Hire more at the
same total cost
LO2
Chapter 11
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Case Study
LO2 Lumber Prices and Housing Markets
Chapter 11
 Demand for lumber = derived demand
 2001, increase in D for housing
 Increased D for lumber
 Increase lumber prices (68% by 2004)
 2005-2007, decline in housing demand
 Reduced D for
building products
 Sharp fall in
lumber prices
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6
The Market Supply of Resources
 Market supply
 Sum of all individual supply curves
 Upward sloping
 As price rises, resource suppliers
 More willing to sell
 Higher earnings
 More goods and services
purchased
 More able to increase quantity
supplied
LO2
Chapter 11
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Resource Price Differences
 Resources
 Flow to their highest-valued use
 If freely mobile
 Adjust across different uses
until they earn the same wage
 Temporary differences
 Market adjustments
 Reallocation of resources
LO2
Chapter 11
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LO2 Exhibit 2
(b) Furniture making
(a) Home building
Sh
S’h
$25
24
Dollars
per hour
Dollars
per hour
Market for Carpenters in Alternative Uses
S’f
Sf
$24
20
Df
Dh
0
0
58 60 Hours of labor
per day (thousands)
10 12
Hours of labor
per day (thousands)
The wage differential prompts carpenters to shift from furniture making
to home building until the wage is identical in the two markets
Chapter 11
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Resource Price Differences
 Permanent differences
 Lack of resource mobility
 Inherent quality of the resource
 Time and money involved in
developing necessary skills
 Nonmonetary
aspects of the job
LO2
Chapter 11
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10
Opportunity Cost and
Economic Rent
 Opportunity cost
– What a resource could earn in its best
alternative use
 Economic rent
– Earnings in excess of opportunity cost
– ‘Pure gravy’
 The less elastic the resource S
– The greater the economic rent as
proportion of total earnings
3
LO
Chapter 11
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11
Opportunity Cost and
Economic Rent
 Perfectly inelastic supply
– No alternative uses
– No opportunity cost
– All earnings are economic rent
 Perfectly elastic supply
– Earns the same in current and best
alternative use
– All earnings are opportunity cost
3 – No economic rent
LO
Chapter 11
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12
LO3 Exhibit 3
Opportunity Cost and Economic Rent
(c) Earnings divided
between economic rent and
opportunity cost
S
Dollars
per unit
(b) All earnings are
opportunity costs
Dollars
per unit
Dollars
per unit
(a) All earnings are
economic rent
S
$14
$1
Opportunity
costs
Economic
rent
Chapter 11
10
Millions of
acres
per month
0
1,000
D
7
Opportunity
costs
D
D
0
Economic
rent
S
$10
Hours of
labor
per day
0
5,000
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10,000
Hours of
labor
per day
13
LO4
The Firm’s Demand
for a Resource
 Quantity of resource L
 Total product TP, Q
 Quantity of output
 Marginal product MP=∆TP/∆L
 Diminishing marginal returns
 Marginal revenue product MRP=∆TR/∆L
 How much total revenue changes as
more labor is employed
 Depends on ∆Q and P
Chapter 11
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14
LO4
Marginal Revenue
Product
 MRP curve = Firm’s demand
curve for the resource
 Perfectly competitive product
market: MRP = MP×P
 MRP curve slopes downward
 Diminishing marginal returns to resource
 Some market power in product market
 MRP curve slopes downward
 Diminishing marginal returns to resource
 Additional output can be sold only if price falls
Chapter 11
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LO4 Exhibit 4
Marginal Revenue Product When a
Firm Sells in a Competitive Market
Chapter 11
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LO4 Exhibit 5
Marginal Revenue Product When a
Firm Sells with Market Power
Chapter 11
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17
LO4
Marginal Resource Cost
 Marginal resource cost
MRC=∆TC/∆L
 Change in total cost when
hiring one more unit of labor
 MRC curve
 Horizontal curve at the equilibrium market wage
 Maximize profit
 Hire resources until MRC=MRP
Chapter 11
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LO4 Exhibit 6
Market Equilibrium for a Resource and the
Firm’s Employment Decision
(b) Firm
Resource
supply
$200
100
Resource
demand
0
E
Workers per day
Dollars per worker per day
Dollars per worker per day
(a) Market
$200
100
0
Marginal revenue product =
Resource demand
Marginal resource cost =
Resource supply
6
10
Workers
per day
In panel (a), market demand and supply determine the resource’s market wage and quantity. In panel (b), an
individual firm can employ as much as it wants at the market wage so that wage becomes the firm’s MRC.
The firm maximizes profit (or minimizes its loss) by hiring a resource up to the point where MRP = MRC.
Chapter 11
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19
LO4
Changes in Resource
Demand
 Changes in MRP (demand)
 Marginal product of the
resource
 Amount of other resources employed
 Substitutes
 Complements
 Technology
 Product’s price
 Change in demand for the product
 Demand for resource = derived demand
Chapter 11
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20
Case Study
LO4 The McMinimum Wage
Chapter 11
 May 2007, minimum hourly wage $7.25
 Only 4% workers earned less
 Advocates
 Increase the income of the
poorest workers
 Critics
 Encourage employers to
 Cut nonwage
compensation
 Scale back
employment
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Case Study
LO4 The McMinimum Wage
Chapter 11
 Higher minimum wage
 Employers
 Substitute part-time
for full-time jobs
 Substitute more
qualified for less
qualified workers
 Adjust nonwage
components
 Higher opportunity cost
of staying in school
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22