Chapter 25 and 26 Imputs and Income

# Chapter 25 and 26 Imputs and Income - Resource Markets...

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Resource Markets Resource prices and income distribution Chapters 25 & 26

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Derived Demand Principle Resources derive their demand from the value of the final product they effect. The structure models assumed input prices given. However, the price of inputs are based on Derived Demand (they are an effect and not given). Resource demand theory explains income distribution Land rent Labor wages (total compensation) Capital interest (Chapter 27)
Strength of demand The strength of demand for any resource is determined by two factors: The value (or price) of the final product The productivity of the resource Marginal Product (MP)—the amount that output increases by employing an additional unit of the resource. Keep in mind the Law of Diminishing Marginal Returns. Value of the Marginal Product (VMP): VMP = Pproduct x MP , that is (in English) “The expected contribution made to the final product.”

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VMP vs MRP (similar) VMP applies for competitive conditions, since P = MR (price-take model) For price-searcher markets, it is more precise to use marginal revenue product or MRP . MR < P, hence MRP = MR x MP (P and MR vary with output.) Nonetheless, MRP = VMP for high levels of competition. If we consider that most industries in the world exhibit something close to very competitive conditions, then we can settle for the more intuitive term, VMP, without much loss
Determining MRP for gold miners L q (oz/wk) MP P gold VMP=MRP 1 3.0 3.0 \$500 \$1,500 2 5.0 2.0 \$500 \$1,000 3 6.8 1.8 \$500 \$900 4 8.4 1.6 \$500 \$800 5 9.8 1.4 \$500 \$700 6 11.0 1.2 \$500 \$600 7 12.0 1.0 \$500 \$500 8 12.8 0.8 \$500 \$400 9 13.4 0.6 \$500 \$300 10 13.8 0.4 \$500 \$200 0 2 4 6 8 10 12 A competitive firm’s demand for Labor is based on the expected MRP (=MP x P).

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Wages like other prices fall within certain limits: Maximum amount: Expected MRP: that is, the expected contribution made to the final product. (Employers cannot be expected to pay more than what someone produces.) Minimum amount: Workers’ expected opportunity costs: that is, a sufficient amount to bid a worker away from the next best alternative. Wage refers to
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Chapter 25 and 26 Imputs and Income - Resource Markets...

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