Micro Chapter 12

The Supply of and Demand for Productive Resources

5 Learning Goals

1) Note the types of productive inputs

2) Construct a demand curve for resources

3) Correlate a resource’s marginal productivity to the firm’s hiring decision

4) Understand the behavior of resource suppliers

5) Apply supply and demand analysis to the resource market

You may skip the paragraphs addressing elasticity of demand, elasticity of supply, and adjusting to dynamic change.

Human and Nonhuman Resources

Anything you do to increase your knowledge and skills is called investment in human capital

A brief digression:

Education is an investment good, not a consumption good

Be careful using CPI in reference

A report on CNN states, “Ten years ago only 16% of the highest-income families borrowed for college. By 2000 that had grown to 45 percent.” This should not be surprising, and it doesn’t indicate that today’s higher-income families are poverty-stricken. It’s a rational response to changing costs and benefits. The costs of borrowing to finance a college education are fairly low today because interest rates are far below what they were in the 1980s. The returns of going to college- the return on the investment in human capital that is represented by time in college and a college degree- far exceed the costs of borrowing. It makes sense to borrow when the returns exceed the costs, and that’s just what students are doing. Students are doing exactly the right thing given the incentives the market is providing.Q: If you currently do not have students loans, why not? If you do, did you borrow the maximum amount? If not, why?

Q12.1 Most millionaires are college graduates.1) True

2) False

True.

4 of 5 millionaires are college graduates.

18% of millionaires have Master’s Degrees.

8% have law degrees.

6% have medical degrees.

6% have Ph.Ds.

Level of Education and Median Income, 2002 (18 Years and Over, All Workers, All Races, Both Sexes)

Not a HS grad$10,838HS graduate (GED included)$18,571Some college (no degree)$20,997Associate’s degree$26,535

Level of Education and Median Income, 2002 (1999 dollars, 25 Years, All Workers, Both Sexes)

Bachelor’s degree

$35,594

Master’s degree

$47,121

Professional degree

$66,968

Doctoral degree

$62,275

The Demand for Resources

Why do firms hire people?The demand for resources is a derived demand- it is dependent on the demand for the product

Why is the resource demand curve downward sloping?

Because of substitutes:

(1) If the price of one resource is high the firm will want less of that resource; the firm will find another one that is cheaper

(2) If resource prices are high, the product price will be high and fewer people will buy it

Q12.2 Which of the following most clearly illustrates the concept of "derived demand"?

1) An increase in the price of steak causes the demand for poultry to increase.

2) An increase in the demand for new houses leads to an increase in the demand for construction workers.

3) An increase in consumer income leads to an increase in the demand for services provided by the government.

4) An increase in the demand for new cars causes the demand for used automobiles to rise.

Q12.3 An increase in the price of a resource would cause

1) producers to substitute other inputs for the resource.

2) consumers to increase consumption of the goods that increase in price as the result of the higher resource price.

3) an increase in the demand for products that use the resource intensely.

4) A reduction in the price of goods produced with the resource.

Marginal Productivity and the Firm’s Hiring

Decision

More specifically, why do firms hire people?

If the firm already has 20 employees, why hire one more?

Because that employee’s marginal production adds to total production

Example: 20 employees produce 50 units, 21 employees produce 55 units, the marginal productivity of the 21st worker is 5 units

From the previous example, what if those 5 new units sold for $10 each and the worker cost $40?

Marginal revenue (MR) = $10Marginal product (MP) = 5Marginal revenue product (MRP) = $50Marginal cost (MC) = $40A new decision rule for the firm: hire people as long as MRP > MC of worker

Q12.4 Assume that skilled labor costs twice as much as unskilled labor, a profit-maximizing firm will

1) always hire more skilled labor because it is more productive

2) always hire more unskilled labor because it is cheaper

3) hire until it equalizes the two marginal products4) hire until the marginal product of unskilled

labor is one-half that of skilled labor5) hire until the marginal product of unskilled

labor is two times that of skilled labor

Q12.5 A profit-maximizing restaurant owner will hire more buspersons to keep more tables clean and quickly available to new customers, as long as

1) the marginal product of buspersons exceeds the marginal product of other employees.

2) the hourly wage of buspersons is lower than that of cashiers and cooks.

3) the marginal revenue product of buspersons exceeds their wage rate.

4) the wage of buspersons exceeds the wage of other employees.

Class Activity:

Explain why it might make perfect economic sense to pay a professional athlete $20 million per year.

The Supply of Resources

If you were currently working for $25 an hour, would you be willing to work more for $30 an hour?

The resource supply curve is upward sloping: higher wages increase quantity supplied

An individual person would work more OR more people would be willing to work when wages increase

Supply, Demand, and Resource Prices

Now we apply Chapter 3 again

Supply of and demand for resources will determine an equilibrium wage

Q12.6 If an advance in computer technology reduces the need for businesses to hire accountants, students majoring in accounting should expect

1) a lower rate of return on their human capital investment.

2) an increase in their employment prospects.

3) a higher wage rate than they were expecting when they selected their major.

4) an increase in the demand for accountants.

S & D graph:

Watch content video: Resource supply and demand

Q12.6 Which of the following is most likely to result from an increase in the demand for computer technicians?

1) an increase in the wages of computer technicians, which will attract additional technicians in the long run

2) an increase in the employment of computer technicians, which will depress current wage rates but eventually lead to higher wage rates for technicians

3) a decline in the number of persons preparing themselves for careers as computer technicians

4) lower wage rates and a shortage of computer technicians

Question Answers:

12.1 = 1

12.2 = 2

12.3 = 1

12.4 = 4

12.5 = 3

12.6 = 1