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Chapter 12 The Demand for Resources Notes

Chapter 12 The Demand for Resources Notes - Chapter 12 The...

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Chapter 12: The Demand for Resources Significance of Resource Pricing : - Money-Income Determination: resource prices are a major factor in determining the income of households; expenditures that firms make in acquiring economic resources flow as wage, rent, interest, and profit incomes to the households that supply those resources - Cost Minimization: To the firm, resource prices are costs; resource prices play a role in quantity of land, labor, capital, and entrepreneurial ability that will be combined - Resource Allocation: Resource prices allocate resources among industries and firms; efficient allocation over time calls for continuing shift of resources from one use to another - Policy Issues: grounded on resource pricing Marginal Productivity Theory of Resource Demand: - A1: firm sells it output in a purely competitive product market and hires a certain resource - Competitive Product Market the firm is a price taker and can expose however much output it chooses at the market price – output decisions does not affect market price o Also a price taker/wage taker in the competitive resource market (purchases such a negligible amount as well) - Resource Demand as a Derived Demand o Resource demand is a schedule or curve showing the amounts of a resource that buyers are willing and able to purchase at various prices over some period of time Derived Demand : the demand for a resource that depends on the demand for the products it helps to produce Resources do not directly satisfy wants, the products they produce do - Marginal Revenue Product o Strength of demand depends on: The productivity of the resource in helping to create a good or service The market value or price of the good or service it helps produce o Marginal Product (MP) : the additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed o Marginal Revenue Product (MRP) : The change in a firm’s total revenue when it employs 1 additional unit of a resource (the quantity of all other resources employed remaining constant); equal to the change in total revenue divided by the change in the quantity of the resource employed) - Rules for Employing Resources: MRP = MRC
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o MRP schedule is the firm’s demand schedule for labor o To maximize profit, a firm should hire additional units of a specific resource as long as each successive unit adds more to the firm's total revenue than it adds to the firm's total cost o Marginal Resource Cost (MRC) : the amount the total cost of employing a resource increases when a firm employs 1 additional unit of the resource (the quantity of all other resources employed remaining constant); equal to the change in the total cost of the resource divided by the change in the quantity of the resource employed It will be profitable for a firm to hire additional units of a resource up
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