Significance of Resource Pricing Marginal Productivity Theory of

Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand 27 CHAPTER Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 1 Next Slide The Demand for Resources Copyright Mc. Graw-Hill/Irwin, 2005

Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 2 Next Slide SIGNIFICANCE OF RESOURCE PRICING • Money Income. Determination • Resource Allocation • Cost Minimization • Policy Issues Copyright Mc. Graw-Hill/Irwin, 2005

Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 3 Next Slide MARGINAL PRODUCTIVITY THEORY OF RESOURCE DEMAND Resource Demand as a Derived Demand Marginal Revenue Product (MRP) • Productivity • Marginal Product (MP) • Product Price Marginal Revenue Product Copyright Mc. Graw-Hill/Irwin, 2005 = Change in Total Revenue Unit change in Resource Quantity

Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 4 Next Slide MARGINAL PRODUCTIVITY THEORY OF RESOURCE DEMAND Marginal Resource = Cost Change in Total (Resource) Cost Unit change in Resource Quantity Rule for Employing Resources: MRP = MRC Copyright Mc. Graw-Hill/Irwin, 2005

GLOBAL PERSPECTIVE Labor Demand Allocation: Selected Nations Significance of Resource Pricing Marginal Productivity Theory of Resource Demand Percentage of Labor Force 0 MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 5 Next Slide Developing Countries Industrially Advanced Countries United States 25 50 75 100 Agriculture Industry Services Copyright Mc. Graw-Hill/Irwin, 2005 Source: International Labour Organization

MRP AS A DEMAND SCHEDULE Pure Competition Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 6 Next Slide Total Units of Product Resource (Output) 0 Marginal Product (MP) Product Total Price Revenue 0 Marginal Revenue Product (MRP) $2 $ 0 ] ] ] Consider the case of] ] ] demand under ] resource ] ] Pure Competition 14 P Resource price (wage rate) Significance of Resource Pricing 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 Q Quantity of resource demanded Copyright Mc. Graw-Hill/Irwin, 2005

MRP AS A DEMAND SCHEDULE Pure Competition Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Total Units of Product Resource (Output) 0 1 0 7 Determinants of Resource Demand Elasticity of Resource Demand Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 7 Next Slide Resource price (wage rate) Optimum Combination of Resources P Marginal Product (MP) ] ] ] Product Total Price Revenue $2 2 7 $ 0 14 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 Q Quantity of resource demanded Copyright Mc. Graw-Hill/Irwin, 2005 Marginal Revenue Product (MRP) ] ] ] $ 14

MRP AS A DEMAND SCHEDULE Pure Competition Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Total Units of Product Resource (Output) 0 1 2 0 7 13 Elasticity of Resource Demand Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 8 Next Slide Resource price (wage rate) Optimum Combination of Resources P Marginal Product (MP) ] ] ] Product Total Price Revenue $2 2 2 7 6 $ 0 14 26 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 Q Quantity of resource demanded Copyright Mc. Graw-Hill/Irwin, 2005 Marginal Revenue Product (MRP) ] ] ] $ 14 12

MRP AS A DEMAND SCHEDULE Pure Competition Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Total Units of Product Resource (Output) 0 1 2 3 0 7 13 18 Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 9 Next Slide Resource price (wage rate) Optimum Combination of Resources P Marginal Product (MP) ] ] ] Product Total Price Revenue $2 2 7 6 5 $ 0 14 26 36 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 Q Quantity of resource demanded Copyright Mc. Graw-Hill/Irwin, 2005 Marginal Revenue Product (MRP) ] ] ] $ 14 12 10

MRP AS A DEMAND SCHEDULE Pure Competition Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 10 Next Slide Total Units of Product Resource (Output) 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 Resource price (wage rate) Significance of Resource Pricing P Marginal Product (MP) ] ] ] Marginal Revenue Product (MRP) Product Total Price Revenue $2 2 2 2 7 6 5 4 3 2 1 14 12 10 8 6 4 2 $ 0 14 26 36 44 50 54 56 ] ] ] $ 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource 0 1 2 3 4 5 6 7 8 Q Quantity of resource demanded Copyright Mc. Graw-Hill/Irwin, 2005

MRP AS A DEMAND SCHEDULE Pure Competition Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 11 Next Slide Total Units of Product Resource (Output) 0 1 2 3 4 5 6 7 Marginal Product (MP) Product Total Price Revenue 0 7 13 18 22 25 27 28 $2 $ 0 7 ] ] 2 14 6 ] 2 26 ] 5 ] 2 36 ] 4 Now, consider the 2 case 44 ] ] 3 2 50 ] ] 2 of resource demand under 2 54 1 ] ] 2 56 Imperfect Competition 14 Resource price (wage rate) Significance of Resource Pricing P 12 10 8 6 4 2 Marginal Revenue Product (MRP) $ 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource 0 1 2 3 4 5 6 7 8 Q Quantity of resource demanded Copyright Mc. Graw-Hill/Irwin, 2005

MRP AS A DEMAND SCHEDULE Imperfect Competition Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 12 Next Slide Total Units of Product Resource (Output) 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 Resource price (wage rate) Significance of Resource Pricing P Marginal Product (MP) ] ] ] Product Total Price Revenue $2. 80 2. 60 2. 40 2. 20 2. 00 1. 85 1. 75 1. 65 7 6 5 4 3 2 1 14 12 10 8 6 4 2 Marginal Revenue Product (MRP) $ 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 imperfectly Competitive seller’s demand for a resource 0 1 2 3 4 5 6 7 8 Q Quantity of resource demanded Copyright Mc. Graw-Hill/Irwin, 2005

DETERMINANTS OF RESOURCE DEMAND Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 13 Next Slide Changes in Product Demand Changes in Productivity • Quantities of Other Resources • Technological Advance • Quality of the Variable Resource Copyright Mc. Graw-Hill/Irwin, 2005

DETERMINANTS OF RESOURCE DEMAND Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 14 Next Slide Changes in the Prices of Other Resources Substitute Resources • Substitution Effect • Output Effect • Net Effect Complementary Resources Occupational Employment Trends Copyright Mc. Graw-Hill/Irwin, 2005

ELASTICITY OF RESOURCE DEMAND Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 15 Next Slide Erd = Percentage change in resource quantity Percentage change in resource price Erd > 1 is Elastic Erd = 1 is Unit-Elastic Erd < 1 is Inelastic Ease of Resource Substitutability Elasticity of Product Demand Ratio of Resource Cost to Total Cost Ratio Copyright Mc. Graw-Hill/Irwin, 2005

Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution OPTIMUM COMBINATION OF RESOURCES Least-Cost Rule Least-Cost Combination of Resources MP of Labor MP of Capital Price of Labor Price of Capital Profit-Maximizing Combination Key Terms Previous Slide End Show 27 - 16 Next Slide MRPL MRPC PL PC Copyright Mc. Graw-Hill/Irwin, 2005 1

MARGINAL PRODUCTIVITY THEORY OF INCOME DISTRIBUTION Significance of Resource Pricing Marginal Productivity Theory of Resource Demand Inequality MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Market Imperfections Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 17 Next Slide Copyright Mc. Graw-Hill/Irwin, 2005

derived demand marginal product (MP) marginal revenue product (MRP) marginal resource cost (MRC) MRP = MRC rule substitution effect output effect elasticity of resource demand least-cost combination of resources profit-maximizing combination of resources marginal productivity theory of income distribution Copyright Mc. Graw-Hill/Irwin, Inc. 2005 BACK END

Significance of Resource Pricing NEXT Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Elasticity of Resource Demand Optimum Combination of Resources Marginal Productivity Theory of Income Distribution Key Terms Previous Slide End Show 27 - 19 Wage Determination Next Slide Chapter 28 Copyright Mc. Graw-Hill/Irwin, 2005