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Chapter 12 - The Demand for Resources Chapter 12 The Demand for Resources QUESTIONS 1. What is the significance of resource pricing? Explain how the factors determining resource demand differ from those determining product demand. Explain the meaning and significance of the fact that the demand for a resource is a derived demand. Why do resource demand curves slope downward? LO1 Answer: All resources that enter into production are owned by someone, including the most important resource of all for most people, self-owned labor. The most basic significance of resource pricing is that it largely determines peoples incomes. Resource pricing allocates scarce resources among alternative uses. Firms take account of the prices of resources in deciding how best to attain least-cost production. Finally, resource pricing has a great deal to do with income inequality and the debate as to what government should or should not do to lessen this inequality. It is here that the factors that determine resource demand are most different from those that determine demand for products. Demand for products is a question of income and tastes. But resource demand is more passive in the sense that it is derived from the demand for the products the resource can produce. If a resource cant be used in production of a desired product, there will not be any demand for it. Additionally, resources are often less mobile than products, so their geographic location relative to demand for the output they produce may be an important factor determining demand for resources in particular geographic areas. Resources, factors of production, are not hired or bought because their employer or buyer desires them for themselves. The demand for resources is entirely derived from what the firm believes the resources can produce. If there were no demand for output, there would be no demand for input. The demand for a resource depends, then, on how productive it is in producing output and on the price of the output. The demand for a resource is downward sloping because of the diminishing marginal product of the resource (because of the law of diminishing returns) and, in imperfectly competitive markets, also because the greater the output, the lower its price. 2. At the bottom of the page, complete the labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market. LO2 a. How many workers will the firm hire if the market wage rate is $27.95? $19.95? Explain why the firm will not hire a larger or smaller number of units of labor at each of these wage rates. b. Show in schedule form and graphically the labor demand curve of this firm. c. Now again determine the firms demand curve for labor, assuming that it is selling in an imperfectly competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower product price by 5 cents in order to sell the marginal product of each successive labor unit. ... View Full Document

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