12 - 1 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources The Demand for Resources
12 - 1 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum.
Dec 25, 2015
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12 - 1
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
The Demand for Resources
12 - 2
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
CIRCULAR FLOW MODEL
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
12 - 3
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
RESOURCE PRICING
Firms demand resources• Land, labor, capital, &
entrepreneurs• Focus on labor
12 - 4
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
RESOURCE DEMAND
Derived demand• Resource demand is
derived from product demand
Demand depends on• Productivity of resource
(MP)• Price of product being
made (P)
12 - 5
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
RESOURCE DEMAND
Marginal Resource Cost(MRC)
MRC =ΔTotal (Resource) Cost
Δ Resource Quantity
MRP =Δ Total Revenue
Δ Resource Quantity
Marginal Revenue Product (MRP)
12 - 6
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Optimal solution:
MRP = MRC
Resource Demand
12 - 7
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Units ofResource
TotalProduct(Output)
MarginalProduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
0 1 2 3 4 5 6 7 8 Q
W141210 8 6 4 2
Quantity of resource demanded
Perfect CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
]]]]]]
0 0 $2 $ 0
Consider the case ofresource demand under
Perfect Competition
12 - 8
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Units ofResource
TotalProduct(Output)
MarginalProduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
W141210 8 6 4 2
Quantity of resource demanded
Perfect CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
01
0 7
7$2 2
$ 0 14
$ 14
12 - 9
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Units ofResource
TotalProduct(Output)
MarginalProduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
W141210 8 6 4 2
Quantity of resource demanded
Perfect CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
012
0 713
76
$2 2 2
$ 0 14 26
$ 14 12
12 - 10
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Units ofResource
TotalProduct(Output)
MarginalProduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
W141210 8 6 4 2
Quantity of resource demanded
Perfect CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
0123
0 71318
765
$2 2 2 2
$ 0 14 26 36
$ 14 12 10
12 - 11
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Units ofResource
TotalProduct(Output)
MarginalProduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
W141210 8 6 4 2
Quantity of resource demanded
Perfect CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
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
12 - 12
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Units ofResource
TotalProduct(Output)
MarginalProduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
W141210 8 6 4 2
Quantity of resource demanded
Perfect CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
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
12 - 13
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Units ofResource
TotalProduct(Output)
MarginalProduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
W141210 8 6 4 2
Quantity of resource demanded
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
12 - 14
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Units ofResource
TotalProduct(Output)
MarginalProduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
W141210 8 6 4 2
Quantity of resource demanded
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
More Inelastic Than PC
12 - 15
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Optimal Combination of Resources
• All resource inputs are variable
• Choose an optimal combination–Minimize cost–Maximize profit
12 - 16
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
The Least Cost Rule
• Minimize cost of producing a given output
• Last dollar spent on each resource yields the same marginal product
MP of Labor (MPL)
Price of Labor (PL)
MP of Capital (MPC)
Price of Capital (PC)=
12 - 17
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
MRP as a Demand Schedule
Determinants of Resource Demand
Optimum Combination of Resources
Profit Maximizing Rule
MRP of each resource equals its price
MRPL
PL
MRPC
PC
= = 1
MRPLPL = MRPCPC =and
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