Market demand for a resource

Resource Demand as Derived Demand

Derived Demand - demand derived from the products that the resources help produces

ü demand for a resource is an inverse relationship between the price of the resource and the quantity of the resource demanded

Ex: the demand for airplane generates a demand for assemblers.

Marginal Revenue Product

· strength of demand of any resource will depend on:

ü productivity of the resource in helping to create a good or service

v resource that is highly productive in turning out a highly valued commodity will be in high demand, but a resource that is capable of only producing a minimally valued commodity and that is relatively unproductive will be little demand

ü market value or price of the good or service it helps produce

v no demand at all for a highly efficient resource that is producing a good or service that nobody wants

v MRP = Δ TR / Δ resource quantity

ü Price of other resources

v substitute resources: a firm will use more resource A when A is relatively cheaper than resource B, assuming they can produce the same good/service

o There is a direct relationship between substitute resources

v complimentary resources: assuming resource A must be used along with resource B, when price of resource A decrease, demand for resource B increase

o There is an indirect relationship between complimentary resources

Rule for Employing Resources: MRP = MRC

ü to max. profit, a firm should hire additional units of a specific resource as long as each successive unit adds more to the firm's TR more than its TC.

ü MRC = Δ Total Resource Cost / unit Δ in resource quantity

ü MRP of the last worker > MRC of worker, firm can profit more by hiring more workers

ü MRC of last worker > MRP of worker, firm profit more by discharging some workers

MRP as Resource Demand Schedule

ü For a purely competitive seller, The MRP schedule equals the firm’s demand for labor because each point of the curve indicates the number of workers the firm would hire at each possible wage rate

ü each firm only hires a small fraction of themarket supply making it not able to affect the market wage rate (i.e. each firm is a wage taker)

Resource Demand under Imperfect Product Market Competition

ü firm's product demand is downsloping, so the firm must set a lower price to increase its sales. Therefore, product price must be lowered to sell the marginal product of each successive worker.

ü MRP falls: marginal product diminishes AND product price falls as output increases

Market Demand for a Resource

Horizontal sum of individual firms' MRP (demand) curves

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