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Chapter 12Chapter 12

The Supply of and Demand The Supply of and Demand for Productive Resourcesfor Productive Resources

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OverviewOverview

The demand for productive resourcesThe demand for productive resources The supply of productive resourcesThe supply of productive resources Equilibrium in the resource marketEquilibrium in the resource market Marginal Revenue Product (MRP)Marginal Revenue Product (MRP) Value Marginal Product (VMP)Value Marginal Product (VMP) Profit maximization and cost Profit maximization and cost

minimization when multiple minimization when multiple resources are usedresources are used

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Demand for ResourcesDemand for Resources

The demand for resources is downward The demand for resources is downward sloping.sloping.

As price increases:As price increases:

1.1. Producers will turn to substitute Producers will turn to substitute goodsgoods

2.2. Consumers will buy less of the Consumers will buy less of the products that the resource makesproducts that the resource makes

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Elasticity of Resource DemandElasticity of Resource Demand

Resource demand will be more elastic:Resource demand will be more elastic:

1. The more substitutes the resource 1. The more substitutes the resource hashas

2. The greater the elasticity of the 2. The greater the elasticity of the product that the resource makesproduct that the resource makes

3. In the Long Run3. In the Long Run

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Supply of ResourcesSupply of Resources

The supply of resources is upward The supply of resources is upward sloping because:sloping because:

As the price of a specific resource As the price of a specific resource increases, the incentive of potential increases, the incentive of potential suppliers to provide the resource suppliers to provide the resource increasesincreases

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Equilibrium!Equilibrium!

The price and quantity of resources The price and quantity of resources will move toward the market will move toward the market equilibrium.equilibrium.

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Shifters of Resource DemandShifters of Resource Demand

1. A shift in the demand for a product 1. A shift in the demand for a product will cause a shift in the demand for will cause a shift in the demand for the resources used to make that the resources used to make that productproduct

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Shifters of Resource DemandShifters of Resource Demand

2. Changes in the productivity of a 2. Changes in the productivity of a resource resource

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Shifters of Resource DemandShifters of Resource Demand

3. Changes in the price of a related 3. Changes in the price of a related resource. resource.

A. SubstitutesA. Substitutes

B. ComplimentsB. Compliments

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Marginal Revenue Product (MRP)Marginal Revenue Product (MRP)

The change in total revenue of a firm The change in total revenue of a firm that results from the employment of that results from the employment of one additional unit of a resource.one additional unit of a resource.

MRP = Marginal Revenue x Marginal MRP = Marginal Revenue x Marginal ProductProduct

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Value Marginal Product (VMP)Value Marginal Product (VMP)

The marginal product of a resource The marginal product of a resource multiplied by the selling price of the multiplied by the selling price of the product it helps produceproduct it helps produce

VMP = Price x Marginal ProductVMP = Price x Marginal Product

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Price Takers vs. Price SearchersPrice Takers vs. Price Searchers

For Price Takers: VMP = MRPFor Price Takers: VMP = MRP

For Price Searchers: VMP > MRPFor Price Searchers: VMP > MRP

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Cost MinimizationCost Minimization

Factors of production will be employed Factors of production will be employed such that the marginal product per such that the marginal product per last dollar spent on each factor is the last dollar spent on each factor is the same for all factorssame for all factors

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ReviewReview

1.1. Understand the demand side of the Understand the demand side of the resource marketresource market

2.2. Understand the supply side of the Understand the supply side of the resource marketresource market

3.3. Understand the market equilibriumUnderstand the market equilibrium

4.4. Know what MRP and VMP is and how they Know what MRP and VMP is and how they relate to price takers and price searchersrelate to price takers and price searchers

5.5. Understand the concept of cost Understand the concept of cost minimizationminimization