Resource Markets

As long as the additional revenue from employing another worker exceeds the additional cost, the firm should hire that worker.

What about capital? What about natural resources? A producer demands another unit of

a resource as long as its marginal revenue exceeds its marginal cost.

People supply their resources to the highest paying alternative, other things held constant.

In the market for goods and services- who is the demander? Who is the supplier?

What about the resource market??• Firms-Demanders• Households-Suppliers

LO2

Resource Market for Carpenters

Exhibit 1

Hours of labor per periodE0

Dol

lars

per

hou

r of

labo

r

W

D

S

The intersection of the upward-sloping supply curve of carpenters with the downward-sloping demand curve determines the equilibrium wage, W, and the level of employment, E.

Because the value of any resources depends on what it produces, the demand for a resources is said to be a derived demand, meaning the demand arises from the demand of the final product.

The market demand for a particular resource is the sum of demands for the resource in all its different uses.

As the price of a resource falls, producers are more willing and able to employ that resource.

The market supply curve for a resource sums all the individual supply curves for that resource.

As the price increases, resource suppliers are more WILLING and ABLE to supply the resource.• This means that the market supply curve

will slope UPWARD.

Resources tend to flow to their highest –valued use.

As long as the nonmonetary benefits of supplying resources to alternative uses are identical and as long as resources are freely mobile, resources adjust across uses until they earn the same in different uses.

Adjustment takes time

LO2

Market for Carpenters in Alternative Uses

Exhibit 2

The wage differential prompts carpenters to shift from furniture making to home building until the wage is identical in the two markets

(a) Home building

Dh

Sh

Dol

lars

per

hou

r

$2524

S’h

Hours of labor

per day (thousands)580 60

(b) Furniture making

Df

SfDol

lars

per

hou

r

20

$24

S’f

Hours of labor

per day (thousands)100 12

Not all resource price differences cause reallocation.• Example- Land in cities• They are explained by:

1) A lack of resource mobility ( Urban land vs. rural land)

2) Differences in the inherent quality of the resource (fertile land vs. non-fertile land)

3) Differences in the time and money involved in developing the necessary skills

4) Differences in nonmonetary aspects of the job

Opportunity cost is what that resource could earn in its BEST alternative use.

Economic rent is the amount earned in excess of his opportunity cost.• The portion of a resource’s earnings that

exceeds the amount necessary to keep the resource in its present use.

• It’s “pure gravy.”

The less elastic the resource supply, the greater the economic rent as a proportion of total earnings.

The supply of a resource market is perfectly inelastic, meaning the resource has no alternative use.

NO opportunity cost. ALL earnings are economic rent

The supply of a resource is perfectly elastic supply.

The market for the resource can earn as much in its best alternative use as in its present use.

ALL earnings are opportunity cost. There is NO economic rent.

The supply curve slopes upward, then most resource suppliers earn economic rent in addition to their opportunity cost.

LO3

Opportunity Cost and Economic Rent

Exhibit 3

(a) All earnings are economic rent

(b) All earnings are opportunity cost

(c) Earnings divided between economic rent and opportunity cost

S

Millions of

acres

per month

100Hours of

labor

per day

1,0000Hours of

labor

per day

5,0000 10,000

D

Dol

lars

per

uni

t

$1

D

S

Dol

lars

per

uni

t

$10

D

S

Dol

lars

per

uni

t

$16

8Economic

rent

Opportunity

cost Opportunity

cost

Economic

rent

The marginal product: the change in total product (output produced) from employing one more unit of labor or capital.

The marginal revenue product of labor indicates how much total revenue changes as more labor is employed.• Marginal revenue product (MRP) of a

resource is the change in the firm’s total revenue resulting from employing an additional unit of the resource.

• It is the firm’s “marginal benefit” of hiring a resource (a worker or machine).

What does another unit of labor cost the firm?• The change in total cost when an additional

unit of a resource is hired, other things held constant.

• The firm will hire MORE labor as long as doing so adds more to revenue than to costs, meaning as long as MRP > MRC

Marginal revenue product = Marginal resource cost• This will hold for competitive markets or

firms with some market power.• Profit maximization will occur where labor’s

marginal revenue product equals the market wage.

LO4

Market Equilibrium for a Resource and the Firm’s Employment Decision

Exhibit 6

(a) Market

Dol

lars

per

wor

ker

per

day

$200

100

Workers per dayE0

(b) Firm

Resource

supply

Resource

demand Dol

lars

per

wor

ker

per

day

$200

100

Marginal resource cost =

Resource supply

Marginal revenue product =

Resource demand

Workers

per day60 10

In panel (a), market demand and supply determine the resource’s market wage and quantity. In panel (b), an individual firm can employ as much as it wants at the market wage so that wage becomes the firm’s MRC. The firm maximizes profit (or minimizes its loss) by hiring a resource up to the point where MRP = MRC.

Two things can change a resource’s marginal product:1) A change in the amount of other resources

employed2) A change in technology

Substitutes• An increase in the price of one increases the

demand for the other. Complements

• A decrease in the price of one leads to an increase in the demand for the other.

Technological improvements can boost the productivity of some resources but make other resources obsolete.• Computer-controlled machines

Since the demand for a resource is DERIVED from the demand for the final output, any change in the demand for output affects resource demand.• CDs