Download Micro chapter 25- presentation 1 Derived Demand

Presentation 1
The Demand for Resources
Derived Demand
 Demand that is derived from the products that the
resource helps produce
 Resources don’t usually go directly to satisfy the
consumer---indirectly through their use in goods and
services
 EX- land, tractor, farmer lead to demand for food
Derived Demand
 The derived nature of resource demand means that the
strength of the demand for any resource will depend
on:
 1. the productivity of the resource in helping to create a
good or service
 2. the market value or price of the good or service it
helps produce
Marginal Revenue Product (MRP)
 The change in a firm’s total revenue
when it employs 1 additional unit of a
resource
 MRP = change in total revenue/change
in the quantity of the resource
employed
Marginal Resource Cost (MRC)
 The amount that each additional unit
of a resource adds to the firm’s total
(resource) cost
 MRC = change in total (resource)
cost/unit change in resource quantity
MRP=MRC Rule
 To maximize profit a firm should employ the quantity
of a resource at which MRP=MRC
 To maximize profit, a firm should hire any additional
units of a specific resource as long as each successive
unit adds more to the firm’s TR than it adds to cost TC
Wage Rate
 In a competitive market, the MRC of labor
exactly equals the market wage rate
MRP as Resource Demand
MRP as Resource Demand Schedule
(1)
(2)
(3)
(4)
(5)
(6)
Units of Total Product
Marginal
Product Total Revenue, Marginal Revenue
Resource
(Output)
Product (MP) Price
(2) X (4)
Product (MRP)
0
1
2
3
4
5
6
7
0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28
$2
2
2
2
2
2
2
2
7
6
5
4
3
2
1
$0
14
26
36
44
50
54
56
$18
Purely
Competitive
Seller’s
Demand for
A Resource
Resource Wage
(Wage Rate)
16
14
12
10
8
6
4
D=MRP
2
0
1
2
3
4
5
6
7
-2
Quantity of Resource Demanded
]
]
]
]
]
]
]
$14
12
10
8
6
4
2
MRP as Resource Demand
MRP as Resource Demand Schedule
(1)
(2)
(3)
(4)
(5)
(6)
Units of Total Product
Marginal
Product Total Revenue, Marginal Revenue
Resource
(Output)
Product (MP) Price
(2) X (4)
Product (MRP)
0
1
2
3
4
5
6
7
0]
7]
13 ]
18 ]
22 ]
25 ]
27
]
28
$2.80
2.60
2.40
2.20
2.00
1.87
1.75
1.65
7
6
5
4
3
2
1
$ 0.00 ]
18.20 ]
31.20 ]
39.60 ]
44.00 ]
46.25 ]
47.25 ]
46.20
$18.20
13.00
8.40
4.40
2.25
1.00
-1.05
$18
Imperfectly
Competitive
Seller’s
Demand for
A Resource
Resource Wage
(Wage Rate)
16
14
D=MRP
(Pure Competition)
12
10
8
6
D=MRP
(Imperfect
2 Competition)
4
0
1
2
3
4
5
6
7
-2
Quantity of Resource Demanded
W 13.1
Marginal Product (MP)
 Additional output resulting from using each
additional unit of labor
 Law of diminishing returns applies to
marginal product---at some point the MP
will decrease
Different Market Structures
 In the oligopoly, pure monopoly and monopolistic
competition, the firms are “price makers”
 The firm’s product demand curve is downsloping
because the firm must set a lower price to increase
sales
 A competitive firm is downsloping due to diminishing
marginal returns
Shifts in the Curve
 Ex- an increase in the demand for new
houses will drive up housing prices. Those
higher prices will increase the MRP of
construction workers and the demand for
construction workers will rise (shift to the
right)
Changes in Productivity
 Other things equal, an increase in the
productivity of a resource will increase the
demand for the resource and a decrease in
productivity will reduce the resource
demand
Substitution Effect
 A firm will purchase more of an input whose
relative price has declined and, conversely, use less
of an input whose relative price has increased
 Ex- If the price of natural gas goes down, firms will
use more natural gas and less petroleum or
electricity
Output Effect
 The situation where an increase in the price
of one input will increase the firm’s
production cost and reduce its level of
output, thus reducing its demand for other
inputs and vice versa