23MeierPP12_18e - Chapter 12 Chapter The Demand for...

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Unformatted text preview: Chapter 12 Chapter The Demand for Resources Resource Market Models Resource 1 - Perfect competition 2 - Imperfect competition Perfect Competition Perfect Large number of buyers Large • No power - too small No • Constant resource price Constant • Perfectly elastic resource supply Perfectly • Perfect Competition Perfect Perfectly Elastic Supply P D3 D1 D2 Q Perfect Competition Perfect Perfectly Elastic Supply P Supply = P (resource) Q Imperfect Competition Imperfect 1 - Monopsony one dominant buyer (employers) 2 - Oligopsony few major buyers (employers) many buyers (employers) 3 - Monopsonistic competition Imperfect Competition Power to influence market Power • Changing resource price Changing • Upward sloping resource supply Upward • Imperfect Competition Upward Sloping Supply Upward P Supply = P (resource) D3 D1 D2 Q PERFECT COMPETITION Most Profitable Input Most Two Methods Total Revenue – Total Cost Marginal Revenue – Marginal Cost TOTAL REVENUE TOTAL COST TRP = P(of product) x Q(of output) TRP TCR = TFC + TVC TCR EP = TRP - TCR MARGINAL REVENUE MARGINAL COST Most Profit: MRP = MCR Most MRP (assuming variable costs are covered) TRP - TCR APPOACH Qr TP 0 1 2 3 4 5 6 7 Pp TRP Pr TVC TFC TCR EP 0 $100 6 100 19 100 19 25 100 29 100 31 100 32 100 32 100 $ 0 $xxx $ 0 $300 $300 $-300 $-300 600 150 150 300 450 150 1900 150 300 300 600 1300 2500 150 450 300 750 1750 2900 150 600 300 900 2000 3100 150 750 300 1050 2050 3200 150 900 300 1200 2000 3200 150 1050 300 1350 1850 MRP - MCR APPOACH Qr 0 1 2 3 4 5 6 7 TRP $0 600 1900 2500 2900 3100 3200 3200 MRP $xxx 600 1300 600 400 200 100 0 TCR $300 450 600 750 900 1050 1200 1350 MCR $xxx 150 150 150 150 150 150 150 EP $-300 $-300 150 1300 1750 2000 2050 2000 1850 Pr = $150 (MCR= Pr) = MRP IMPERFECT COMPETITION Most Profitable Input Most Same Methods Total Revenue – Total Cost Marginal Revenue – Marginal Cost TOTAL REVENUE TOTAL COST TRP = P(of product) x Q(of output) TRP TCR = TFC + TVC TCR EP = TRP - TCR MARGINAL REVENUE MARGINAL COST Most Profit: MRP = MCR Most MRP (assuming variable costs are covered) TRP - TCR APPOACH Qr TP 0 1 2 3 4 5 6 7 Pp TRP Pr TVC TFC TCR EP 0 $100 6 100 19 100 19 25 100 29 100 31 100 32 100 32 100 $ 0 $xxx $ 0 $300 $300 $-300 $-300 600 50 50 300 350 250 1900 75 150 300 450 1450 2500 100 300 300 600 1900 2900 125 500 300 800 2100 3100 150 750 300 1050 2050 3200 175 1050 300 1350 1850 3200 200 1400 300 1700 1500 MRP - MCR APPOACH Qr 0 1 2 3 4 5 6 7 TRP $0 600 1900 2500 2900 3100 3200 3200 MRP $xxx 600 1300 600 400 200 100 0 TCR $300 350 450 600 800 1050 1350 1700 MCR $xxx 50 100 150 200 250 300 350 EP $-300 $-300 250 1450 1900 2100 2050 1850 1500 Pr = $50 - 200 MCR = MRP MRP is a Demand Schedule Units of Units resource Total product Marginal product MP Product price Total revenue Marginal revenue product MRP 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 Resource price (wage rate) ] ] ] ] ] 14 12 10 8 6 4 2 0 P 7 6 5 4 3 2 1 $2 2 2 2 2 2 2 2 $0 14 14 26 26 36 36 44 44 50 50 54 54 56 56 ] ] ] ] ] $ 14 12 12 10 10 8 6 4 2 The purely competitive seller’s resource demand Q 2 3 4 5 6 7 8 1 MRP is a Demand Schedule Units of Units resource Total product Marginal product MP Product price Total revenue Marginal revenue product MRP 0 1 2 3 4 5 6 7 0 7 13 18 22 25 27 28 Resource price (wage rate) ] ] ] ] ] 14 12 10 8 6 4 2 0 P 7 6 5 4 3 2 1 $2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65 $ 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 resource demand D 1 2 3 4 5 6 7 8 Q Graphing Resource Demand Pr D o Q Changes in Demand Pr D1 o Q D2 NON-PRICE FACTORS NON-PRICE Resource Demand Product demand Product • Productivity Productivity • Price of substitute resources Price • Price of complementary resources resources • Product Demand Product If the demand for the product If increases, the demand for resources used to make the product increases. If the demand for the product decreases, the demand for resources used to make the product decreases. make Derived Demand Derived Resource demand is derived Resource derived from the demand for products. demand Demand for cotton shirts up, Demand demand for cotton up. demand Demand for autos down, Demand demand for steel and auto workers down. workers Productivity Productivity Resources that are more Resources productive are more in demand. productive If resource A is more If productive than resource B , the demand for A will increase, while B will decrease. Substitutes Substitutes PA↑ DB ↑ PA↓ DB ↓ Substitution effect Complements Complements PA↑ DB ↓ PA↓ DB ↑ Complementary effect THREE EFFECTS THREE Substitution effect: Complementary effect: Output effect: PA↑ DB↓ PA↓ DB↑ PA↑ DB↑ PA↓ DB↓ PA↑ costs ↑ profits ↓ output ↓ DB↓ PA↓ costs ↓ profits ↑ output ↑ DB↑ ELASTICITY ELASTICITY Resource Demand P % change in Qd (resource) % change in P (resource) Elastic: Ed>1 Inelastic: Ed<1 0 Q DEMAND ELASTICITY DEMAND • Number of substitutes: more substitutes, more elastic substitutes, • Product elasticity: product elastic, resource elastic resource • Percentage of costs: higher %, elastic Percentage • Rate of decline in MP: slower decline, elastic elastic • Time: longer, elastic Time: Resource Combination Principles Resource Least-Cost Rule: MP of Labor Price of Labor MP of Capital Price of Capital Profit-Maximizing Combination: MRPL PL MRPC PC 1 Least-Cost Combination Rule Least-Cost MP of Labor Price of Labor MP of Capital Price of Capital Similar to utility maximization: MUA PA MUB PB Movie or Concert? Rating scale: 1 – 100 Rating Movie: 28 Concert: 90 Prices: Movie: $7 Concert: $45 Which should you attend? Answer... Answer... You should attend the You movie. Why? The marginal utility per dollar is higher than the concert. the 28/$7 = 4 28/$7 90/$45 = 2 Labor or Capital? Marginal product: Marginal Labor: 28 Capital: 90 Prices: Labor: $7 Capital: $45 Which should you use more of? Answer... Answer... You should employ more You labor. Why? The marginal product per dollar is higher than for capital. than Labor: 28/$7 = 4 Labor: 28/$7 Capital: 90/$45 = 2 90/$45 Problem Marginal product: Marginal Labor: 36; Capital: 100 Prices: Labor: $12; Capital: $25 Which one is the better value? Capital Why? 4/$1 vs. 3/$1 vs. 3/$1 Profit Maximizing Combination Profit MRPL PL MRPC PC 1 Prices: Labor: $10;Capital: $25 Under perfect competition: PL = MCRL ($10); PC= MCRC ($25) MCR ($10); MCR MRPL? $10 MRPC? $25 $10 MRP $25 ...
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