14 - 1 Copyright McGraw-Hill/Irwin, 2005 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants

14 - 1Copyright McGraw-Hill/Irwin, 2005

Significance of Resource Pricing

Marginal Productivity Theory of Resource Demand

MRP as a Demand Schedule

Determinants of Resource Demand

Elasticity of Resource Demand

Optimum Combination of Resources

Marginal Productivity Theory of Income Distribution

Key Terms

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The Demand for Resources

14C H A P T E R









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SIGNIFICANCE OFRESOURCE PRICING

•Money Income- Determination

•Resource Allocation

•Cost Minimization

•Policy Issues









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MARGINAL PRODUCTIVITYTHEORY OF RESOURCE DEMANDResource Demand as a Derived

DemandMarginal Revenue Product

(MRP)•Productivity•Marginal Product (MP)•Product Price

MarginalRevenueProduct

=Change in

Total Revenue

Unit change inResource Quantity









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MARGINAL PRODUCTIVITYTHEORY OF RESOURCE DEMAND

Rule for Employing Resources:

MRP = MRC

MarginalResource

Cost=

Change in Total (Resource) Cost

Unit change in Resource Quantity









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Percentage of Labor Force0 25 50 75 100

DevelopingCountries

IndustriallyAdvancedCountries

UnitedStates

Agriculture

Agriculture

Agriculture

Industry

Industry

IndustryServices

Services

Services

GLOBAL PERSPECTIVELabor Demand and Allocation: Selected Nations

Source: International Labour Organization









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Units ofResource

TotalProduct(Output)

MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)

Quantity of resource demanded

Pure CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

]]]]]]

0 0 $2 $ 0

Consider the case ofresource demand under

Pure Competition









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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)



]]]]]]

01

0 7

7$2 2

$ 0 14

$ 14









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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)



]]]]]]

012

0 713

76

$2 2 2

$ 0 14 26

$ 14 12









Key Terms

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)



]]]]]]

0123

0 71318

765

$2 2 2 2

$ 0 14 26 36

$ 14 12 10









Key Terms

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)



]]]]]]

01234567

0 7131822252728

7654321

$2 2 2 2 2 2 2 2

$ 0 14 26 36 44 50 54 56

$ 14 12 10 8 6 4 2

The purely competitiveseller’s demand fora resource









Key Terms

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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)



]]]]]]

01234567

0 7131822252728

7654321

$2 2 2 2 2 2 2 2

$ 0 14 26 36 44 50 54 56

$ 14 12 10 8 6 4 2

The purely competitiveseller’s demand fora resource

Now, consider the caseof resource demand under

Imperfect Competition.









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Units ofResource


MarginalProduct

(MP)Product

PriceTotal

Revenue

MarginalRevenue

Product (MRP)

]]]]]]

0 1 2 3 4 5 6 7 8 Q

P 141210 8 6 4 2R

esou

rce

pric

e(w

age

rate

)


Imperfect CompetitionMRP AS A DEMAND SCHEDULE

]]]]]]

01234567

0 7131822252728

7654321

$2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65

$ 0 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

The imperfectlyCompetitive seller’sdemand for a resource









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DETERMINANTS OF RESOURCE DEMAND

Changes in Product Demand

Changes in Productivity• Quantities of Other

Resources• Technological Advance• Quality of the Variable

Resource









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DETERMINANTS OF RESOURCE DEMAND

Changes in the Prices of Other Resources

Substitute Resources• Substitution Effect• Output Effect• Net Effect

Complementary ResourcesOccupational Employment

Trends









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ELASTICITY OF RESOURCE DEMAND

Ease of Resource Substitutability

Elasticity of Product Demand

Ratio of Resource Cost to Total

Cost Ratio

Erd = Percentage change in resource price

Percentage change in resource quantity

Erd > 1 is ElasticErd = 1 is Unit-ElasticErd < 1 is Inelastic









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OPTIMUM COMBINATIONOF RESOURCES

Least-Cost Rule

Profit-Maximizing Combination

MP of Labor MP of Capital

Price of Labor Price of Capital

MRPL

PL

MRPC

PC1

Least-Cost Combination of Resources









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MARGINAL PRODUCTIVITY THEORYOF INCOME DISTRIBUTION

Inequality

Market Imperfections

derived demandmarginal product (MP)marginal revenue product (MRP)marginal resource cost (MRC)MRP = MRC rulesubstitution effectoutput effectelasticity of resource demandleast-cost combination of resources

profit-maximizing combination of resources

marginal productivity theory of income distributionENDBACKCopyright McGraw-Hill/Irwin, 2005









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Wage Determination

Chapter 15

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14 - 1 Copyright McGraw-Hill/Irwin, 2005 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants