Resource Markets

1
Resource Markets
2
Resource Demand

• A firm demands additional units of resource so
  long as the marginal revenue generated by that
  additional unit exceeds its cost.
• Resource owners will supply their resource to the
  highest paying alternative, other things equal
• Demand for a resource is derived from the demand
  for the product the resource produces

3
Observations

• As the price of a resource falls, produces are
  more willing and able to employ that resource
• Substitution exists---
• Labor for automation
• One resource for another

4
Exhibit 1 Resource Market for Carpenters
5
Price Differentiation

• In the absence of barriers, the price of a
  resource will level out across industries
• In the adjustment period, resource prices can vary

6
Exhibit 2 Market for Carpenters in Alternative
Uses Home Building and Furniture Making
7
Permanent Differences

• Geographic Differences
• Differences in the inherent quality of the
  resources
• Differences in the time and money involved in
  getting the necessary skills
• Differences in non-monetary aspects of the job.

8
Exhibit 3a Opportunity Cost and Economic Rent
(All Resource Returns are Economic Rent)
Supply is vertical. Resource has NO Alternative
use. Price is set by the Demand for the
Resource.
9
Exhibit 3b Opportunity Cost and Economic Rent
(All Resource Returns are Opportunity Costs)

• Resource can
• Earn 10 in its best
• Alternative use.
• No employment
• Unless you accept
• Market price
• Supply determines wage
• Demand determines
• quantity

10
Exhibit 3c Opportunity Cost and Economic Rent
(Resource Returns are Divided Between Economic
Rent and Opportunity Cost)
An intermediate Situation- Supply AND Demand
set market Price
11
Resource Demand

• Firm demand a resource up to the point where the
  Marginal Revenue Product equals the marginal
  Resource Cost
• Marginal Revenue Product- the total revenue
  change for the next unit of resource
• Marginal Resource Cost- the total cost increase
  of the additional unit of resource

12
Market
Firm
13
Other Resource Effects

• Some resources are complements increase in price
  of one decreases demand for the other ( vice
  versa)
• A valuable resource can make other resources more
  effective
• Technolgical changes can enhance the productivity
  of some resources
• Changes in the Demand for Final Products affects
  demand for resources

14
Minimum Wage Effects

• At wages higher than equilibrium employers might
  substitute part-time for full-time work
• Higher wages cause the opportunity cost of
  staying in school to increase, leading to
  dropouts
• No real economic effect of increases

15
Exhibit 7 Functional Distribution of Income
Percentage Share of Each Source of National
Income by Decade
Source Irving Kravis, Income Distribution
Functional Shares. International Encyclopedia of
Social Sciences 7 (Free Press, 1968), and
Economic Report of the President, February 1999.