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The Supply and Demand for Productive Resources

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Title: The supply and demand for productive resources Author: Gwartney, Macpherson, Skipton Description: 2002 -- 10th Edition Last modified by: Robert Moden – PowerPoint PPT presentation

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Title: The Supply and Demand for Productive Resources


1
The Supply and Demand for Productive Resources
Two classes of productive resources Non-human
resources Physical capital Land Natural
resources Human resources (Human
capital) Composed of the skills, knowledge, and
experience of workers.
2
  • The Circular Flow of Goods and Services

Goods and Services Markets
Payments
. a. Businesses supply goods services b.
Receive sales revenue. c. Households,
(investors, governments, and foreigners) demand
goods.
a. Business firms demand resources b.
Households supply labor and other resources c.
in exchange for income.
Households
Businesses
Resource Markets
Resources
3
Derived Demand for Resources
The demand for resources is derived from the
demand for the products that the resources help
produce.
A service station hires mechanics because of
their customers demand for repair services.
4
Demand Inversely Related to Price
  • Substitution in production
  • If one input becomes more expensive, producers
    will shift to lower-cost inputs.
  • The better the substitute inputs, the more
    elastic the demand for the resource.
  • Substitution in consumption
  • A high resource prices raises the product price
    and consumers substitute other goods.
  • The more elastic products demand, the more
    elastic is the demand for the resource.

5
The Demand for Resources
Resource price
  • As a resource price increases, producers will
  • use substitute resources, or
  • face higher costs

These lead to higher prices and a reduction in
consumption.
P2
  • At the lower output, firms use less of the
    resource that increased in price.

A
P1
  • Both contribute to the inverse relationship
    between the price and quantity demanded of a
    resource.

D
Q1
Q2
Quantity
6
Time and the Elasticity of Demand for Resources
Resource price
  • the easier it is to switch to substitute
    inputs, and/or,
  • the more elastic the demand for the products the
    resource helps to produce.

P2
  • The long-run demand for a resource is almost
    always more elastic than demand in the short-run.

P1
Dsr
Q1
Q2
Quantity
Q3
7
Shifting Resource Demand
  • Changes in product demand
  • - cause the demand for its input resources to
    change in the same direction.
  • Changes in the productivity of a resource
  • - If productivity rises, the demand rises.
  • Changes in the price of related inputs
  • - The following increase resource demand
  • an increase in a substitute input price
  • a decrease in a complimentary input price
  • The following decrease resource demand
  • a decrease in a substitute input price
  • an increase in a complimentary input price

8
  • The Back of the Purple Sheet

What effect would each of the following tend to
have on a firms demand for a particular
resource, increase (a) or decrease (b) a. An
increase in the demand for the firms product
___ b. A decrease in the amounts of all other
resources the firm employs. ____ c. An increase
in the productivity of the resource ____ d. An
increase in the price of a substitute resource
when the output effect is greater than the
substitution effect. _____ e. A decrease in the
price of a complementary resource. ___ f. A
decrease in the price of a substitute resource
when the substitution effect is greater than the
output effect. ___
a
a
a
b
b
b
9
Hiring Resources
  • Hire up to where
  • Marginal Revenue Product Resource Price
  • Marginal revenue product (MRP) Change in total
    revenue from the employment of an additional unit
    of a resource.

Remember
10
  • The Yellow Sheet

Units of Labor Total Output Marginal Product Product Price Total Revenue MRP
1 14 5
2 26 5
3 37 5
4 46 5
5 53 5
6 58 5
7 62 5
11
  • The Yellow Sheet

Units of Labor Total Output Marginal Product Product Price Total Revenue MRP
1 14 14 5 70 70
2 26 12 5 130 60
3 37 11 5 185 55
4 46 9 5 230 45
5 53 7 5 265 35
6 58 5 5 290 25
7 62 4 5 310 20
12
Numbers, Numbers, Numbers
  • A firm sells its product for 200 each (4).
  • The marginal product (3) shows how output
    changes as workers (units of labor) are hired
  • The marginal revenue product (6) shows how
    hiring an additional worker affects the firms
    total revenue.

MRP (6)
Marginal Product (3)
Total Revenue (5)
Price (per unit) (4)
Variable factor (1)
Output (per week) (2)
----
0.0
0
0
-----
5.0
5.0
1,000
1000
9.0
4.0
1,800
800
12.0
2,400
3.0
600
14.0
2.0
2,800
400
15.5
1.5
3,100
300
16.5
1.0
3,300
200
3,400
100
17.0
0.5
13
Demand for Resources
  • The MRP curve is the firms short run demand
    curve for the resource.

Variable factor
MRP
----
0
1000
1000
1
  • It slopes downward because the marginal product
    of the resource falls as more of it is used with
    a fixed amount of other resources.

800
2
600
3
800
400
4
300
5
200
6
100
7
600
400
  • How will they decide how many to hire?

200
1
2
3
4
5
6
7
14
Choosing Between Resources
1. Maximize Profits find the output level
where profits are maximized.
  • Deal with each resource independently.
  • Hire until
  • - MRP labor Price of labor
  • - MRP capital Price of capital

15
Choosing Between Resources
2. Minimizing the Cost of Production -check the
Marginal Productivity per -choose the greater
up to desired output.
  • If MP labor 15 and Price 5, then MP/P 3
  • If MP capital 20 and Price 5, then MP/P 4
  • use capital

16
  • The Purple Sheet
  1. What is the least-cost combination of labor and
    capital to employ in producing 80 units of
    output? ____ C and _____ L

b. What is the profit-maximizing combination of
capital and labor for the firm to employ? ___ C
___ L Total output __
Units of Capital MP of Capital Units of Labor MP of Labor
1 24 1 11
2 21 2 9
3 18 3 8
4 15 4 7
5 9 5 6
6 6 6 4
7 3 7 1
8 1 8 .5
17
similar to the Purple Sheet
Labor (price 8)
Capital (price 12)
Minimize cost of 50 units of output
Maximize profits
Quan. Total Product Marginal Product Total Revenue MRP Quan. Total Product Marginal Product Total Revenue MRP
0 0 0 0 0 0 0 0 0 0
1 12 12 24 24 1 13 13 26 26
2 22 10 44 20 2 22 9 44 18
3 28 6 56 12 3 28 6 56 12
4 33 5 66 10 4 32 4 64 8
5 37 4 74 8 5 35 3 70 6
6 40 3 80 6 6 37 2 74 4
7 42 2 84 4 7 38 1 76 2
18
To maximize profits would you (a) increase
Capital (b) increase Labor (c)
keep both the same (d) increase both
(e) decrease one or both in the following
cases a. MRPL 8 PL 4 MRPC 8, PC
4. b. MRPL 10 PL 12 MRPC 14, PC 9.
c. MRPL 6 PL 6 MRPC 12, PC 12. d.
MRPL 22 PL 26 MRPC 16, PC 19
19
Supply Positively Related to Price
  • The short-run supply elasticity is determined by
    how easily the resource can be transferred from
    one use to another, or resource mobility.
  • If resources are highly mobile then the supply
    curve will be elastic even in the short run.
  • The supply of a resource will be more elastic in
    the long run than the short run.
  • In the long run, investment can increase the
    supply of both physical and human resources.

20
Resource Supply
S
  • As a resources price increases, individuals
    have a greater incentive to supply it.
  • Thus, a positive relationship will exist between
    a resources price and the quantity supplied in
    the market.

P2
A
P1
Q1
Q2
21
Time and Resource Supply Elasticity
  • The supply of CPA services for example

S
  • If CPA wages increase from P1 to P2, the
    short-run response will be an increase in CPA
    services from Q1 to Q2. Some CPAs work more
    and some come out of retirement.

P2
P1
  • At the higher wage P2, Q3 CPA services are
    supplied to the market.
  • The long-run supply of a resource is almost
    always more elastic than short-run supply.

Q3
Q1
Q2
22
  • Supply

Demand
and
Resource Prices
23
Resources Prices
  • Determined by supply and demand.
  • Changes in the market prices influence the
    decisions of both users and suppliers.
  • Higher resource prices - more substitutes used.
  • Higher resource prices - more of the resource
    supplied.

24
Equilibrium
Wage (resource price)
  • market demand is downward sloping, reflecting
    declining MRP
  • market supply slopes upward as higher prices
    (wages) induce individuals to supply more.
  • price P1 brings the choices of buyers and sellers
    into harmony.

P1
  • At equilibrium price P1, the quantity demanded
    will just equal the quantity supplied.

Quantity
Q1
25
The Coordinating Function of Resource Prices
  • Changes in resource prices in response to
    changing market conditions are essential for
    efficient allocation of resources.
  • Profit is a reward for entrepreneurs who are able
    to see and act on opportunities to put resources
    to higher valued uses.

26
Adjusting to Dynamic Change
  • An increase in demand for housing (product
    market)

leads to an increase in
demand for electricians (resource market).
  • In the product market, the equilibrium price and
    output of houses both rise (to P2 and Q2).
  • In the resource market, the equilibrium price
    and output of electrician services will
    increase substantially (to P2 and Q2).

Product Market
Resource Market
Ssr
Price
Price (wage)
S
P2
P2
P1
P1
D1
D1
Quantity
Quantity
Q1
Q2
Q1
Q2
27
Adjusting to Dynamic Change
  • This significant increase in price and modest
    increase in output is a characteristic of the
    highly inelastic nature of the short-run supply
    of the skilled electricians labor.
  • The higher resource price will attract new human
    capital investments and, with time, the
    resource supply curve will become more
    elastic, moderating the resource price (to P3)
    and increasing its quantity supplied (to Q3).

Product Market
Resource Market
Ssr
Price
Price (wage)
S
P2
P2
P3
P1
P1
D2
D2
D1
D1
Quantity
Quantity
Q1
Q2
Q1
Q2
Q3
28
The 10 Fastest Growing US Occupations in
Percentage Terms, 2000-2010
Occupation Thousand Jobs Percentage
2000 2010 Increase
Computer software engineer, applications 380 760 100
Computer support specialists 506 996 97
Computer software engineers, systems 317 601 90
Computer systems administrators 229 416 82
Data communication analysts 119 211 77
Desktop publishers 38 63 66
Database administrators 106 176 66
Personal and home care aides 414 672 62
Computer system analysts 431 689 60
Medical assistants 329 516 57
29
The 10 Most Rapidly Declining US Occupations in
Percentage Terms, 2000-2010
Thousand Jobs Percentage
Occupation 2000 2010 Increase
Railroad brake, signal, and switch operators 22 9 -59
Shoe machine operators 9 4 -56
Telephone operators 54 35 -35
Radio mechanics 7 5 -29
Loan interviewers 139 101 -27
Motion picture projectionists 11 8 -27
Meter readers 49 36 -27
Rail track layers 12 9 -25
Farmers and ranchers 1294 965 -25
Shoe and leather workers 19 15 -21
30
1. The demand curve for a human resource will be
more elastic the a. more and better substitutes
are available for it. b. more difficult it is to
substitute other resources for it. c. more
inelastic the demand for the product the resource
is used to produce. d. shorter the time period
under consideration.
2. If skilled labor is three times the cost of
unskilled labor, a profit-maximizing firm will
vary the quantity of each type of labor until
the a. marginal product of each is the
same. b. amount of unskilled labor used is three
times the quantity of skilled labor
used. c. amount of unskilled labor used is
one-third the quantity of skilled labor
used. d. marginal product of unskilled labor is
one-third that of skilled labor.
31
3. The notion that the demand for inputs depends
on the demand for outputs is termed a. inverse
demand. b. derived demand. c. proportional
demand. d. complementary demand. 4. What
concept implies that a firms MRP curve for labor
will slope downward in the short
run? a. diminishing marginal returns b. the law
of supply c. the law of decreasing cost d. the
price equalization principle 5. Which
one of the following labor resources will likely
have the most inelastic supply schedule in the
short run? a. filling station attendants b.
sales clerks c. construction laborers d.
dentists
32
6. Suppose the United Auto Workers Union
succeeded in obtaining a 10 percent increase in
the wages of its workers and that the wage
increase caused automobile prices to rise.
Employment in the auto industry would be most
likely to decline significantly if a. the demand
for American-made automobiles was highly
elastic. b. the supply of foreign-produced
automobiles was highly inelastic. c. American
consumers considered foreign automobiles a poor
substitute for American automobiles. d. the
demand for American automobiles was relatively
constant and highly inelastic. 7. If the demand
for a consumer good decreases, the demand for
resources required to make the good
will a. increase. b. remain the same, but the
quantity demanded will increase. c. decrease. d. i
ncrease or decrease depending on whether the
demand for the product is elastic or inelastic.
33
The following chart indicates the reductions in
total losses due to theft if a jewelry store
hires additional security guards. Number Dol
lar Value of of Guards Thefts
Prevented 1 150 2 250 3 340 4 420
5 490 6 540 8. If the security guards can
be hired for 75 per day, how many guards should
the shop hire? a. 2 b. 3
c. 4 d. 5 e. 6
34
9. An increase in the demand for a product will
cause a. both the demand for and prices of the
resources used to produce the product to decline.
b. both the demand for and prices of the
resources used to produce the product to
increase. c. the demand for the resources used to
produce the product to increase and their prices
to decline. d. the demand for the resources used
to produce the product to decline and their
prices to increase. 10. If the demand for
workers with doctorate degrees in economics
increases, we would expect a. the wages of
economists to increase in the short run and the
number of economists employed to increase in the
long run. b. the supply of economists to increase
in the short run and their wages to rise in the
long run. c. a rapid increase in the supply of
economists, causing wages to remain
constant. d. the wages of economists to decrease
in the short run and the number of economists
employed to increase in the long run.
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