Page 559 - Economics

CONFIRMING PAGES

CHAPTER 25
491
The Demand for Resources
maker. This means that for each additional unit of labor FIGURE 25.1 The purely competitive seller’s demand
hired, total resource cost increases by exactly the amount for a resource. The MRP curve is the resource demand curve; each of
its points relates a particular resource price ( MRP when profit is
of the constant market wage rate. The MRC of labor ex- maximized) with a corresponding quantity of the resource demanded.
actly equals the market wage rate. Thus, resource “price” Under pure competition, product price is constant; therefore, the downward
(the market wage rate) and resource “cost” (marginal re- slope of the D MRP curve is due solely to the decline in the resource’s
marginal product (law of diminishing marginal returns).
source cost) are equal for a firm that hires a resource in a
competitive labor market. Then the MRP MRC rule P
tells us that, in pure competition, the firm will hire work-
ers up to the point at which the market wage rate (its MRC) $14
is equal to its MRP. 12
In terms of the data in columns 1 and 6 in Table 25.1 ,
if the market wage rate is, say, $13.95, the firm will hire Resource price (wage rate) 10
only one worker. This is so because the first worker adds 8
$14 to total revenue and slightly less—$13.95—to total 6
cost. In other words, because MRP exceeds MRC for the 4
first worker, it is profitable to hire that worker. For each 2
successive worker, however, MRC ( $13.95) exceeds D = MRP
MRP ( $12 or less), indicating that it will not be profit- 0 1 2 3 4 5 6 7 8 Q
able to hire any of those workers. If the wage rate is Quantity of resource demanded
$11.95, by the same reasoning we discover that it will pay
the firm to hire both the first and second workers.
Similarly, if the wage rate is $9.95, three workers will be curve is downsloping; the firm must set a lower price to
hired. If it is $7.95, four. If it is $5.95, five. And so forth. increase its sales.
So here is the key generalization: The MRP schedule The productivity data in Table 25.1 are retained in col-
constitutes the firm’s demand for labor, because each umns 1 to 3 in Table 25.2 . But here we show in column 4 that
point on this schedule (or curve) indicates the number product price must be lowered to sell the marginal product of
of workers the firm would hire at each possible wage each successive worker. The MRP of the purely competitive
rate. seller of Table 25.1 falls for a single reason: Marginal product
In Figure 25.1 , we show the D MRP curve based on diminishes. But the MRP of the imperfectly competitive
1
the data in Table 25.1 . The competitive firm’s resource seller of Table 25.2 falls for two reasons: Marginal product
demand curve reflects an inverse relationship between diminishes and product price falls as output increases.
the wage rate and the quantity of labor demanded. We emphasize that the lower price accompanying
The curve slopes downward because of diminishing each increase in output (total product) applies not only to
returns. the marginal product of each successive worker but also to
all prior output units that otherwise could have been sold
Resource Demand under at a higher price. Observe that the marginal product of the
Imperfect Product Market second worker is 6 units of output. These 6 units can be
sold for $2.40 each, or, as a group, for $14.40. But this is
Competition not the MRP of the second worker. To sell these 6 units,
Our analysis of labor demand becomes more complex when the firm must take a 20-cent price cut on the 7 units pro-
the firm is selling its product in an imperfectly competitive duced by the first worker—units that otherwise could have
market, one in which the firm is a price maker. Pure mo- been sold for $2.60 each. Thus, the MRP of the second
nopoly, oligopoly, and monopolistic competition in the worker is only $13 [ $14.40 (7 20 cents)], as shown.
product market all mean that the firm’s product demand Similarly, the third worker adds 5 units to total prod-
uct, and these units are worth $2.20 each, or $11 total. But
to sell these 5 units, the firm must take a 20-cent price cut
1
Note that we plot the points in Figure 25.1 halfway between succeeding on the 13 units produced by the first two workers. So the
numbers of resource units, because MRP is associated with the addition third worker’s MRP is only $8.40 [ $11 (13 20 cents)].
of 1 more unit. Thus, in Figure 25.1, for example, we plot the MRP of The other figures in column 6 are derived similarly.
1 _
the second unit ($12) not at 1 or 2 but at 1 This “smoothing” enables us
2
to sketch a continuously downsloping curve rather than one that moves In Figure 25.2 we graph the MRP data from Table
downward in discrete steps as each new unit of labor is hired. 25.2 and label it “ D MRP (imperfect competition).”

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