Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
27
C HAPTE R
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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The Demand for
Resources
Copyright McGraw-Hill/Irwin, 2005
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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SIGNIFICANCE OF
RESOURCE PRICING
•Money IncomeDetermination
•Resource Allocation
•Cost Minimization
•Policy Issues
Copyright McGraw-Hill/Irwin, 2005
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
MARGINAL PRODUCTIVITY
THEORY OF RESOURCE DEMAND
Resource Demand as a Derived
Demand
Marginal Revenue Product
(MRP)
•Productivity
•Marginal Product (MP)
•Product Price
Key Terms
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Marginal
Revenue
Product
Copyright McGraw-Hill/Irwin, 2005
=
Change in
Total Revenue
Unit change in
Resource Quantity
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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MARGINAL PRODUCTIVITY
THEORY OF RESOURCE DEMAND
Marginal
Resource =
Cost
Change in Total (Resource) Cost
Unit change in Resource Quantity
Rule for Employing Resources:
MRP = MRC
Copyright McGraw-Hill/Irwin, 2005
GLOBAL PERSPECTIVE
Labor Demand and Allocation:
Selected Nations
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
Percentage of Labor Force
0
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Developing
Countries
Industrially
Advanced
Countries
Key Terms
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United
States
25
50
75
100
Agriculture
Industry
Services
Agriculture
Industry
Services
Agriculture
Industry
Services
Source: International Labour Organization
Copyright McGraw-Hill/Irwin, 2005
MRP AS A DEMAND SCHEDULE
Pure Competition
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Total
Units of Product
Resource (Output)
0
Marginal
Product
(MP)
Product Total
Price Revenue
0
Marginal
Revenue
Product (MRP)
$2
$ 0
]
]
]
]
]
]
Consider
the case of]
]
] demand under
]
resource
]
]
Pure
Competition
14
P
Resource price
(wage rate)
Significance of
Resource Pricing
12
10
8
6
4
2
0
1
2
3
4
5
6
7
8
Q
Quantity of resource demanded
Copyright McGraw-Hill/Irwin, 2005
MRP AS A DEMAND SCHEDULE
Pure Competition
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Total
Units of Product
Resource (Output)
0
1
0
7
Determinants of
Resource Demand
Elasticity of Resource
Demand
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Resource price
(wage rate)
Optimum
Combination of
Resources
P
Marginal
Product
(MP)
]
]
]
]
]
]
Product Total
Price Revenue
$2
2
7
$ 0
14
14
12
10
8
6
4
2
0
1
2
3
4
5
6
7
8
Q
Quantity of resource demanded
Copyright McGraw-Hill/Irwin, 2005
Marginal
Revenue
Product (MRP)
]
]
]
]
]
]
$ 14
MRP AS A DEMAND SCHEDULE
Pure Competition
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Total
Units of Product
Resource (Output)
0
1
2
0
7
13
Elasticity of Resource
Demand
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Resource price
(wage rate)
Optimum
Combination of
Resources
P
Marginal
Product
(MP)
]
]
]
]
]
]
Product Total
Price Revenue
$2
2
2
7
6
$ 0
14
26
14
12
10
8
6
4
2
0
1
2
3
4
5
6
7
8
Q
Quantity of resource demanded
Copyright McGraw-Hill/Irwin, 2005
Marginal
Revenue
Product (MRP)
]
]
]
]
]
]
$ 14
12
MRP AS A DEMAND SCHEDULE
Pure Competition
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Total
Units of Product
Resource (Output)
0
1
2
3
0
7
13
18
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Resource price
(wage rate)
Optimum
Combination of
Resources
P
Marginal
Product
(MP)
]
]
]
]
]
]
Product Total
Price Revenue
$2
2
2
2
7
6
5
$ 0
14
26
36
14
12
10
8
6
4
2
0
1
2
3
4
5
6
7
8
Q
Quantity of resource demanded
Copyright McGraw-Hill/Irwin, 2005
Marginal
Revenue
Product (MRP)
]
]
]
]
]
]
$ 14
12
10
MRP AS A DEMAND SCHEDULE
Pure Competition
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Total
Units of Product
Resource (Output)
0
1
2
3
4
5
6
7
0
7
13
18
22
25
27
28
Resource price
(wage rate)
Significance of
Resource Pricing
P
Marginal
Product
(MP)
]
]
]
]
]
]
Marginal
Revenue
Product (MRP)
Product Total
Price Revenue
$2
2
2
2
2
2
2
2
7
6
5
4
3
2
1
14
12
10
8
6
4
2
$ 0
14
26
36
44
50
54
56
]
]
]
]
]
]
$ 14
12
10
8
6
4
2
The purely competitive
seller’s demand for
a resource
0
1
2
3
4
5
6
7
8
Q
Quantity of resource demanded
Copyright McGraw-Hill/Irwin, 2005
MRP AS A DEMAND SCHEDULE
Pure Competition
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Total
Units of Product
Resource (Output)
0
1
2
3
4
5
6
7
Marginal
Product
(MP)
Product Total
Price Revenue
0
7
13
18
22
25
27
28
$2
$ 0
7
]
]
2
14
6
]
2
26 ]
5
]
2
36 ]
4
Now, consider
the2 case
44 ]
]
3
2
50 ]
]
2
of resource demand
under
2
54
1
]
]
2
56
Imperfect
Competition
14
Resource price
(wage rate)
Significance of
Resource Pricing
P
12
10
8
6
4
2
Marginal
Revenue
Product (MRP)
$ 14
12
10
8
6
4
2
The purely competitive
seller’s demand for
a resource
0
1
2
3
4
5
6
7
8
Q
Quantity of resource demanded
Copyright McGraw-Hill/Irwin, 2005
MRP AS A DEMAND SCHEDULE
Imperfect Competition
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Total
Units of Product
Resource (Output)
0
1
2
3
4
5
6
7
0
7
13
18
22
25
27
28
Resource price
(wage rate)
Significance of
Resource Pricing
P
Marginal
Product
(MP)
]
]
]
]
]
]
Product Total
Price Revenue
$2.80
2.60
2.40
2.20
2.00
1.85
1.75
1.65
7
6
5
4
3
2
1
Marginal
Revenue
Product (MRP)
14
12
10
8
6
4
2
$ 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
demand for a resource
0
1
2
3
4
5
6
7
8
Q
Quantity of resource demanded
Copyright McGraw-Hill/Irwin, 2005
DETERMINANTS OF RESOURCE DEMAND
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Changes in Product Demand
Changes in Productivity
• Quantities of Other
Resources
• Technological Advance
• Quality of the Variable
Resource
Copyright McGraw-Hill/Irwin, 2005
DETERMINANTS OF RESOURCE DEMAND
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Changes in the Prices of
Other Resources
Substitute Resources
• Substitution Effect
• Output Effect
• Net Effect
Complementary Resources
Occupational Employment
Trends
Copyright McGraw-Hill/Irwin, 2005
ELASTICITY OF RESOURCE DEMAND
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Erd =
Percentage change in resource quantity
Percentage change in resource price
Erd > 1 is Elastic
Erd = 1 is Unit-Elastic
Erd < 1 is Inelastic
Ease of Resource Substitutability
Elasticity of Product Demand
Ratio of Resource Cost to Total
Cost Ratio
Copyright McGraw-Hill/Irwin, 2005
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
OPTIMUM COMBINATION
OF RESOURCES
Least-Cost Rule
Least-Cost Combination of Resources
MP of Labor
MP of Capital
Price of Labor
Price of Capital
Profit-Maximizing Combination
Key Terms
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MRPL
MRPC
PL
PC
Copyright McGraw-Hill/Irwin, 2005
1
MARGINAL PRODUCTIVITY THEORY
OF INCOME DISTRIBUTION
Significance of
Resource Pricing
Marginal Productivity
Theory of Resource
Demand
Inequality
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Market Imperfections
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Copyright McGraw-Hill/Irwin, 2005
derived demand
marginal product (MP)
marginal revenue product (MRP)
marginal resource cost (MRC)
MRP = MRC rule
substitution effect
output effect
elasticity of resource demand
least-cost combination of resources
profit-maximizing combination of resources
marginal productivity theory of income distribution
Copyright McGraw-Hill/Irwin, Inc. 2005
BACK
END
Significance of
Resource Pricing
NEXT
Marginal Productivity
Theory of Resource
Demand
MRP as a Demand
Schedule
Determinants of
Resource Demand
Elasticity of Resource
Demand
Optimum
Combination of
Resources
Marginal Productivity
Theory of Income
Distribution
Key Terms
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Wage
Determination
Next
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Chapter 28
Copyright McGraw-Hill/Irwin, 2005