Economic Concepts

Ch 12-Demand For Resources

• Derived Demand-from the products that resources produce.

• Marginal Revenue Product(MRP)-change in tl revenue resulting from the use of each additional unit of resource.

• MRP=MRC – WHY? Profit seeking rule

Profit Seeking Rule

• To maximize profits a firm should hire additional units of a resource as long as each successive unit adds more to firm’s total revenue than to total cost.

MRP=MRC

• MRP measures how much each successive unit of resource adds to revenue

• MRC measures each additional unit of resource adds to resource cost.

• MRP=MRC is similar to MR=MC; same profit maximization rule

• MRP=MRC deals with inputs• MR=MC deals with outputs

(1)Units of

Resource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

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1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Res

ou

rce

Wag

e(W

age

Rat

e)

Quantity of Resource Demanded

D=MRP(Pure Competition)

ImperfectlyCompetitiveFirm’sDemand forA Resource D=MRP

(ImperfectCompetition)

12-5

Demand Curve

• Imperfectly Competitive Seller Demand Curve– Slopes Downward– Marginal Product & Product Price fall as

resource employment and output rise.

• Pure Competition Seller Demand Curve– Downward slope is greater than imperfect– Pure competitor can sell added output at a

constant price.

Ch 13 Wage Determination

• Purely competitive labor market– Numerous firms compete for labor – Qualified workers w/ identical skills supply

labor– Firms and individual workers are “wage

takers”

Role of Productivity

• Labor demand depends on productivity

• U.S. labor highly productive– Plentiful capital– Access to abundant natural resources– Advanced technology– Labor quality– Other factors

Competitive Labor Market

• Market demand for labor– Sum of firm demand– Example: carpenters

• Market supply for labor– Upward sloping– Competition among industries

• Labor market equilibrium– MRP = MRC rule

Wag

e R

ate

(Do

llar

s)

Wag

e R

ate

(Do

llar

s)

($10)WC

($10)WC

Labor Market Individual Firm

Quantity of Labor Quantity of Labor

QC

(1000)

0 0

D=MRP(∑ mrp’s)

d=mrp

qC

(5)

s=MRC

S

e

c

b

a

Competitive Labor Market

13-10

Monopsony

• Employer has buying power• Characteristics

– Single buyer– Labor immobile– Firm “wage maker”

• Firm labor supply upward sloping• MRC higher than wage rate• Equilibrium

Wag

e R

ate

(Do

llars

)

Quantity of Labor

0

S

MRP

MRC

c

b

aWc

Wm

Qm Qc

• Examples of monopsony power

Monopsony Model

13-12

Key Terms

• wage rate

• nominal wage

• real wage

• purely competitive labor market

• monopsony

• exclusive unionism

• occupational licensing

• inclusive unionism

• bilateral monopoly

• minimum wage

• wage differentials

• marginal revenue productivity

• noncompeting groups

• human capital

• compensating differences

• incentive pay plan

13-13

Chapter 14 Rent, Interest,Profit

• Economic rent• The loanable funds theory • Interest rate variation• Economic profits• Distribution of U.S. earnings

Economic Rent

• Price paid for land and other natural resources

• Perfectly inelasticity supply

• Changes in demand

• A surplus payment

Interest

• Price paid for use of money• Stated as a percentage• Money is not a resource• Loanable funds theory

–Supply of loanable funds–Demand for loanable funds

Loanable Funds Theory

• Extending the model• Financial institutions• Changes in supply

– Household thrift• Changes in demand

– Rate of return on investment• Other participants

Sources of Economic Profit

• Static economy• Risk and profit

– Insurable and uninsurable risks– Changes in economic environment,

structure of economy, government policy

• Innovations and profit• Monopoly and profit