Page 557 - Economics

CONFIRMING PAGES

CHAPTER 25
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The Demand for Resources
will combine resource (labor) demand with labor supply to analyze wage rates. In Chapter 27 we will use
resource demand and resource supply to examine the prices of, and returns to, other productive re-
sources. Issues relating to the use of natural resources are the subject of Chapter 27 Web.

Significance of Resource Pricing price. The firm is selling such a negligible fraction of total
output that its output decisions exert no influence on prod-
There are several good reasons to study resource pricing: uct price. Similarly, in the competitive resource market,
• Money-income determination Resource prices are a the firm is a “wage taker.” It hires such a negligible fraction
major factor in determining the income of house- of the total supply of the resource that its hiring decisions
holds. The expenditures that firms make in acquiring do not influence the resource price.
economic resources flow as wage, rent, interest, and
profit incomes to the households that supply those
resources. Resource Demand as a
• Cost minimization To the firm, resource prices are Derived Demand
costs. And to obtain the greatest profit, the firm must Resource demand is the starting point for any discussion
produce the profit-maximizing output with the most of resource prices. The demand for a resource is an inverse
efficient (least costly) combination of resources. Re- relationship between the price of the resource and
source prices play the main role in determining the the quantity of the resource demanded. This demand is a
quantities of land, labor, capital, and entrepreneurial derived demand : It is derived from the products that the
ability that will be combined in producing each good resources help produce. Resources usually do not directly
or service (see Table 2.1). satisfy customer wants but do so indirectly through their
• Resource allocation Just as product prices allocate use in producing goods and services. No one wants to con-
finished goods and services to consumers, resource sume an acre of land, a John Deere tractor, or the labor
prices allocate resources among industries and firms. services of a farmer, but households do want to consume the
In a dynamic economy, where technology and product food and fiber products that these resources help produce.
demand often change, the efficient allocation of Similarly, the demand for airplanes generates a demand for
resources over time calls for the continuing shift of assemblers, and the demands for such services as income-
resources from one use to another. Resource pricing tax preparation, haircuts, and child care create derived de-
is a major factor in producing those shifts. mands for accountants, barbers, and child care workers.
• Policy issues Many policy issues surround the
resource market. Examples: To what extent should Marginal Revenue Product
government redistribute income through taxes and The derived nature of resource demand means that the
transfers? Should government do anything to dis- strength of the demand for any resource will depend on:
courage “excess” pay to corporate executives? Should • The productivity of the resource in helping to create
it increase the legal minimum wage? Is the provision a good or service.
of subsidies to farmers efficient? Should government • The market value or price of the good or service it
encourage or restrict labor unions? The facts and helps produce.
debates relating to these policy questions are A resource that is highly productive in turning out a highly
grounded on resource pricing. valued commodity will be in great demand. On the other
hand, a relatively unproductive resource that is capable of
Marginal Productivity Theory producing only a minimally valued commodity will be
in little demand. And there will be no demand at all for a
of Resource Demand resource that is phenomenally efficient in producing
To make things simple, let’s first assume that a firm hires a something that no one wants to buy.
certain resource in a purely competitive resource market
and sells its output in a purely competitive product market. Productivity Table 25.1 shows the roles of produc-
The simplicity of this situation is twofold: In a competitive tivity and product price in determining resource demand.
product market the firm is a “price taker” and can dispose Here we assume that a firm adds one variable resource,
of as little or as much output as it chooses at the market labor, to its fixed plant. Columns 1 and 2 give the number

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