ECON; Unit 3 - Resource Markets

Resource Payment Name

- Land = Rent - Labor = Wages - Capital = Interest - Entrepreneurial Ability = Profit/Losses

Firms achieve the optimal resource utilization where:

MRP = MRC

The demand for a resource is described as __________ demand. A) optimal B) derived C) market D) individual

derived

Higher Productivity & Demand: If marginal product goes up for each unit of input, what happens to the total product at each level of input used?

Total product at each unit has also increased.

The MRP curve for labor

is the firm's labor demand curve

To get total revenue

multiple the quantity or total product by the price.

Higher Productivity & Demand: If a resource is more productive,

that by definition means it marginal product has increased.

Assume labor is the only variable input and that an additional input of labor increases total output from 72 to 80 units. If the product sells for $10 per unit in a purely competitive market, the MRP of this additional worker is A) $8. B) $10. C) $80. D) $48.

$80.

Marginal Revenue Product

- Firms act like individuals and compare marginal benefits and costs. - The MRP is like the marginal benefit from a resource. - Once we see the marginal cost of a resource we can see how firms make decisions about employing resources.

Substitutes

- Goods, services, or resources that are viewed as replacements for one another. - Remember back to our discussion on substitutes and complements. Ex.'s of substitutes; Coke and Pepsi, Corn Syrup and sugar, almonds and peanuts, pens and pencils, TV shows and going to the movie theatre, etc.

Which of the following statements describes marginal resource cost? A) It equals the change in total cost from an additional unit of output produced by an additional unit of resource employed. B) It equals the change in total revenue from an additional unit of output produced by an additional unit of resource employed. C) It equals marginal product multiplied by price. D) It illustrates the demand curve for a resource.

It equals the change in total cost from an additional unit of output produced by an additional unit of resource employed.

A profit-maximizing firm employs resources to the point where A) resource price equals product price. B) MP = product price. C) MRC = MP. D) MRP = MRC.

MRP = MRC.

Suppose the demand for strawberries rises sharply, resulting in an increased price for strawberries. As it relates to strawberry pickers, we could expect the A) MRP curve to shift to the left. B) MP curve to shift downward. C) MRC curve to shift downward. D) MRP curve to shift to the right.

MRP curve to shift to the right.

Higher Productivity & Demand: If TR increases, what happens to MRP?

MRP increases. (MRP = the change in total revenue divided by the change in resource quantity. Higher TR means higher MRP.)

Higher Productivity & Demand: If total product increases, what happens to total revenue (ceteris paribus)?

TR increases. (A higher Q means higher TR. TR = P x Q)

Marginal Resource Cost (MRC)

The additional cost incurred as a result of utilizing (1) more unit of a variable resource. It is the change in total resource cost divided by the change in resource quantity.

Derived Demand Process; If demand for a good increases what happens to the price?

The price increases. A rightward shift of demand increases price.

3rd Determinant for Resource Demand

The price of another resource.

Which of the following will not shift the demand curve for labor? A) a change in the wage rate/resource cost B) an increase in the price of the product that labor is helping to produce C) the use of a larger stock of capital with the labor force D) the adoption of a more efficient method of combining labor and capital in the production process

a change in the wage rate/resource cost

MRP

can help us determine the demand curve a firm has for a resource.

Remember,

that marginal product is the additional output produced as a result of utilizing one more unit of a variable resource. Each increase in marginal product means an increase in the total product.

The marginal revenue product schedule is A) the firm's resource supply schedule. B) the same whether the firm is selling in a purely competitive or imperfectly competitive market. C) upward sloping. D) the firm's resource demand schedule.

the firm's resource demand schedule.

We say that the demand for labor is a derived demand because A) we demand the product that labor helps produce rather than labor service per se. B) labor is hired using the MRP = MRC rule. C) the forces of supply and demand do not apply directly to labor markets. D) labor is a necessary input in the production of every good or service.

we demand the product that labor helps produce rather than labor service per se.

The labor demand curve of a firm A) will shift to the left if the price of the product the labor is producing falls. B) is perfectly elastic if the firm is selling its product in a purely competitive market. C) reflects a direct relationship between the number of workers hired and the money wage rate. D) is the same as its marginal product curve.

will shift to the left if the price of the product the labor is producing falls.

Determinant for resource demand: Higher Productivity means

- More use of other resources - Better quality - Technological improvements

Complements

Goods, services, or resources that are used or consumed with one another. Ex's of complements: Peanut butter and jelly, chips and guacamole, chicken wings and ranch dressing, smartphones and apps, boats and water skis.

Assuming a firm is selling its output in a purely competitive market, its resource demand curve can be determined by

Multiplying marginal product by product price.

Price of Complement Increases

Other resources use with this resource are more expensive so resource demand decreases.

Price of Complements Decreases

Other resources used with this resource are less expensive so resource demand increases.

Price of a substitute Decreases

other replacement resources are less expensive so resource demand decreases.

Discuss the payments made to owners of the four categories of resource, and describe the marginal resource cost.

- Firms must hire resources to produce more output - Land owners receive rent, Labor owners received wages/salaries, Capital owners receive interest, and entrepreneurs receive profits or losses. - Marginal resource cost is the additional cost firms incur when they hire additional units of a resource. It is the change in total resource cost as the firm changes output. - Firms make decisions about when to hire additional units of a resource on the margin. - A firm will hire an additional unit of resource if the Marginal Revenue from the additional output is GREATER than the Marginal Cost of the additional resource hired.

Discuss the process through which firms determine the optimal level of resource employment.

- Firms use marginal analysis to determine optimal level of resources to hire. - If MRP > MRC, firms will hire an additional unit of resource. - Firms will continue to hire additional units of the resource up to the point where the MRP=MRC (optimal level) - At this point, the firm has received the maximum additional revenue it can receive relative to the additional cost incurred. - Firms will not hire an additional unit if MRP < MRC. - This is similar to the MR = MC rule of profit maximization.

Derived Demand Process; If total revenue increases, what happens to MRP (ceteris paribus)?

- MRP increases. - MRP = the change in total revenue divided by the change in resource quantity. - Higher TR means higher MRP.

Compare and contrast total product (TP), marginal product (MP), and marginal revenue product (MRP).

- TP is the total output produced by a given number of workers in a given time span. It is the sum of marginal product of a resource. - MP and TP are the same for the first worker. - MP is the change in total product when another resource is added to the production mix. - MRP is the marginal product of an additional resource employed multiplied by the price of the additional unit of output. Can also be calculated as the change in TR as an additional resource employed which generates additional revenue. - It is the extra revenue a firm received as a benefit from the additional cost of hiring an additional unit of resource.

Compare and contrast the determinant of resource demand.

- The demand for a resource depends on the demand for goods and services the resource helps produce. - If the demand for a good increases, then demand for resource to produce it increases. - If the demand or a good decreases, then demand for resource produce it decreases. - Productivity is another determinant. If productivity increases so does demand for resource. - Change in price of other resources (substitutes and complements) are the last determinant of demand. - If price of substitute decrease; then demand for resource decreases. - If price of substitute increase; then demand for resource increases. - If price of complement increase; then demand for resource increases. - If price of complement decrease; then demand for resource decreases. - For all three determinants of resource demand, changes in these determinants cause the demand curve for a resource to shift either to the right or to the left.

Discuss the relationship between MRP and the demand for labor.

- The demand for resources is a derived demand. That means the demand for a resource is derived from, or depends on, the demand for the good or service the resource helps to produce. - Firms make decisions to hire additional resources on the margin. - MRP is the extra revenue a firm received when it sells and additional unit of output. - MRC illustrates the additional cost of hiring an additional unit of a resource. - The demand for a resource is determined by comparing the MRP to the MRC. - Firms will demand an additional unit of a resource if the MRP is greater than or equal to the MRC.

Determinants for Resource Demand

- The demand for the good or service that resource is used to product. - Productivity. - The price of another resource. - If one of these determinants changes, so does demand.

Derived Demand Process; If MRP increases, what happens to the demand for the resource?

- The demand increases. - Higher MRP means the demand curve for the resource, which maps along the MRP, will also increases.

Derived Demand Process; If the price of a product increases, what happens to the total revenue (assuming constant or increasing quantity)?

- Total revenue increases. - A higher Price means higher TR. - TR = P x Q

The productivity of a resource is affective positively when

- higher quantities of other resources are used with it. - the quality of production increases - Technological improvements take place.

Which of the following statements best illustrates the concept of derived demand? A) When the price of gasoline goes up, the demand for motor oil will decline. B) A decline in the demand for shoes will cause the demand for leather to decline. C) A decline in the price of margarine will reduce the demand for butter. D) As income goes up, the demand for farm products will increase by a smaller relative amount.

A decline in the demand for shoes will cause the demand for leather to decline.

Which of the following increases in labor demand is due to a change in the price of a related resource? A) Snowboarding increases in popularity, thus increasing the demand for the workers who make snowboards. B) A decrease in the price of wood decreases the cost of furniture, thus increasing the demand for furniture workers. C) A technological change increases output per worker in the computer industry, thus increasing the demand for computer workers. D) Software sales rise, thus increasing the demand for software developers.

A decrease in the price of wood decreases the cost of furniture, thus increasing the demand for furniture workers.

Derived Demand

A type of demand specific to resources that occurs as a result of the demand for the goods and services produced by those resources. To understand how the demand for a good or service the resource is used to produce can impact the demand for that resource, we need to consider the concept of derived demand.

Which of the following scenarios will cause the demand curve for a resource to increase? A) A decrease in productivity B) An increase in the price of a complement C) An increase in the price of a substitute D) A decrease in the price of a substitute

An increase in the price of a substitute

Which of the following statements does not describe marginal revenue product? A) It equals marginal product multiplied by price. B) It equals the change in total revenue from an additional unit of output produced by an additional unit of resource employed. C) It illustrates the demand curve for a resource. D) It equals the change in total cost from an additional unit of output produced by an additional unit of resource employed.

It equals the change in total cost from an additional unit of output produced by an additional unit of resource employed.

Marginal Revenue Product (MRP)

The additional revenue generated as a result of utilizing (1) more unit of a variable resource. - MRP = the change in total revenue divided by the change in resource quantity.

What happens to the demand for a resource if the product becomes less productive?

The demand curve decreases (shifts to the left)

What happens to the demand for a resource if the product becomes more productive?

The demand curve increases (shifts to the right)

Higher Productivity & Demand: If MRP increases, what happens to the demand for the resource?

The demand increases. (Higher MRP means the demand curve for the resource, which maps along the MRP, will also increase. )

In the United States, professional football players earn much higher incomes than professional soccer players. This occurs because A) the marginal productivity of soccer players exceeds that of football players. B) football and soccer games are highly substitutable products for most consumers. C) most football players are good soccer players, while the reverse is not true. D) consumers have a greater demand for football games than for soccer games.

consumers have a greater demand for football games than for soccer games.

Marginal Product

is the additional output produced as a result of utilizing one more unit of a variable resource (often labor or capital). Simply take the change in total product divided by the change in the quantity of labor.

Price of a substitute increases then

other replacement resources are more expensive so resource demand increases.

An employer hiring in a competitive labor market should hire additional labor as long as A) MC exceeds MR. B) the wage rate is less than MP. C) average product exceeds MP. D) the MRP exceeds the wage rate.

the MRP exceeds the wage rate.