The Demand for Resources ANSWERS TO END-OF-CHAPTER QUESTIONS 25-1 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? 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 people’s 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 can’t 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. 25-2 ( Key Question ) Complete the following labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market. Units
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