Page 561 - Economics

CONFIRMING PAGES

CHAPTER 25
493
The Demand for Resources
CONSIDER THIS . . . Changes in Product Demand
Other things equal, an increase in the demand for a product
She’s The One will increase the demand for a resource used in its produc-
In what economist Robert tion, whereas a decrease in product demand will decrease
Frank calls “winner-take-all- the resource demand.
markets,” a few highly talented Let’s see how this works. The first thing to recall is
performers have huge earn- that a change in the demand for a product will change its
ings relative to the average price. In Table 25.1 , let’s assume that an increase in prod-
performers in the market. Be- uct demand boosts product price from $2 to $3. You
cause consumers and firms should calculate the new resource demand schedule (col-
seek out “top” performers, umns 1 and 6) that would result, and plot it in Figure 25.1
small differences in talent or to verify that the new resource demand curve lies to the
popularity get magnified into
huge differences in pay. right of the old demand curve. Similarly, a decline in the
In these markets, con- product demand (and price) will shift the resource demand
sumer spending gets chan- curve to the left. This effect—resource demand changing
neled toward a few performers. along with product demand—demonstrates that resource
The media then “hypes” these individuals, which further in- demand is derived from product demand.
creases the public’s awareness of their talents. Many more con- Example: Assuming no offsetting change in supply, an
sumers then buy the stars’ products. Although it is not easy to increase in the demand for new houses will drive up house
stay on top, several superstars emerge. prices. Those higher prices will increase the MRP of con-
The high earnings of superstars results from the high reve- struction workers, and therefore the demand for construc-
nues they generate from their work. Consider Shania Twain. If tion workers will rise. The resource demand curve such as
she sold only a few thousand CDs and attracted only a few in Figure 25.1 or Figure 25.2 will shift to the right.
hundred fans to each concert, the revenue she would pro-
duce—her marginal revenue product—would be quite mod-
est. So, too, would be her earnings. Changes in Productivity
But consumers have anointed Shania as queen of country/ Other things equal, an increase in the productivity of a
pop. “She’s the one” and thus the demand for her CDs and resource will increase the demand for the resource and a
concerts is extraordinarily high. She sells millions of CDs (nearly decrease in productivity will reduce the resource demand.
50 million thus far), not thousands, and draws thousands to her
concerts, not hundreds. Her extraordinarily high net earnings If we doubled the MP data of column 3 in Table 25.1 , the
derive from her extraordinarily high MRP. MRP data of column 6 would also double, indicating a
So it is for the other superstars in the “winner-take-all mar- rightward shift of the resource demand curve.
kets.” Influenced by the media, but coerced by no one, con- The productivity of any resource may be altered in
sumers direct their spending toward a select few. The resulting several ways:
strong demand for these stars’ services reflects their high MRP. • Quantities of other resources The marginal produc-
And because top talent (by definition) is very limited, super- tivity of any resource will vary with the quantities of
stars receive amazingly high earnings. the other resources used with it. The greater the
amount of capital and land resources used with,
say, labor, the greater will be labor’s marginal
productivity and, thus, labor demand.
Determinants of Resource • Technological advance Technological improvements

Demand that increase the quality of other resources, such as
capital, have the same effect. The better the quality of
What will alter the demand for a resource—that is, shift capital, the greater the productivity of labor used
the resource demand curve? The fact that resource with it. Dockworkers employed with a specific
demand is derived from product demand and depends on amount of real capital in the form of unloading
resource productivity suggests two “resource demand shift- cranes are more productive than dockworkers with
ers.” Also, our analysis of how changes in the prices the same amount of real capital embodied in older
of other products can shift a product’s demand curve conveyor-belt systems.
(Chapter 3) suggests another factor: changes in the prices • Quality of the variable resource Improvements in
of other resources . the quality of the variable resource, such as labor, will

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