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Economic Concepts Ch 12-Demand For Resources • Derived Demand-from the products that resources produce. • Marginal Revenue Product(MRP)-change in tl revenue resulting from the use of each additional unit of resource. • MRP=MRC – WHY? Profit seeking rule Profit Seeking Rule • To maximize profits a firm should hire additional units of a resource as long as each successive unit adds more to firm’s total revenue than to total cost. MRP=MRC • MRP measures how much each successive unit of resource adds to revenue • MRC measures each additional unit of resource adds to resource cost. • MRP=MRC is similar to MR=MC; same profit maximization rule • MRP=MRC deals with inputs • MR=MC deals with outputs (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) Imperfectly Competitive Firm’s Demand for A Resource 0 7 13 18 22 25 27 28 ] ] ] ] ] ] ] 7 6 5 4 3 2 1 $2.80 2.60 2.40 2.20 2.00 1.87 1.75 1.65 $ 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 16 Resource Wage (Wage Rate) 0 1 2 3 4 5 6 7 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 12-5 Demand Curve • Imperfectly Competitive Seller Demand Curve – Slopes Downward – Marginal Product & Product Price fall as resource employment and output rise. • Pure Competition Seller Demand Curve – Downward slope is greater than imperfect – Pure competitor can sell added output at a constant price. Ch 13 Wage Determination • Purely competitive labor market – Numerous firms compete for labor – Qualified workers w/ identical skills supply labor – Firms and individual workers are “wage takers” Role of Productivity • Labor demand depends on productivity • U.S. labor highly productive – Plentiful capital – Access to abundant natural resources – Advanced technology – Labor quality – Other factors Competitive Labor Market • Market demand for labor – Sum of firm demand – Example: carpenters • Market supply for labor – Upward sloping – Competition among industries • Labor market equilibrium – MRP = MRC rule Competitive Labor Market Labor Market Individual Firm a ($10) WC ($10) WC D=MRP (∑ mrp’s) 0 Wage Rate (Dollars) Wage Rate (Dollars) S QC (1000) Quantity of Labor 0 e b c s=MRC d=mrp qC (5) Quantity of Labor 13-10 Monopsony • Employer has buying power • Characteristics – Single buyer – Labor immobile – Firm “wage maker” • Firm labor supply upward sloping • MRC higher than wage rate • Equilibrium Monopsony Model Wage Rate (Dollars) MRC S b a Wc Wm c MRP 0 Qm Qc Quantity of Labor • Examples of monopsony power 13-12 Key Terms • wage rate • minimum wage • nominal wage • wage differentials • real wage • marginal revenue productivity • purely competitive labor market • noncompeting groups • monopsony • human capital • exclusive unionism • compensating differences • occupational licensing • incentive pay plan • inclusive unionism • bilateral monopoly 13-13 Chapter 14 Rent, Interest,Profit • • • • • Economic rent The loanable funds theory Interest rate variation Economic profits Distribution of U.S. earnings Economic Rent • Price paid for land and other natural resources • Perfectly inelasticity supply • Changes in demand • A surplus payment Interest • • • • Price paid for use of money Stated as a percentage Money is not a resource Loanable funds theory –Supply of loanable funds –Demand for loanable funds Loanable Funds Theory • Extending the model • Financial institutions • Changes in supply – Household thrift • Changes in demand – Rate of return on investment • Other participants Sources of Economic Profit • Static economy • Risk and profit – Insurable and uninsurable risks – Changes in economic environment, structure of economy, government policy • Innovations and profit • Monopoly and profit