Chapter 7: Resource Markets

Chapter Focus:

How businesses maximize profits by choosing how much of each economic resource to use

The demand for resources by businesses that are price-takers and price-makers in the markets in which they sell their products

The supply of labour, how wage rates are determined, and labour market equilibrium

Factors that change resource demand

Price elasticity of resource demand and the factors that determine it

How Resource Markets Operate:

Wage: the amount earned by a worker for providing labour for a certain period of time; sometimes know as salary

The Demand for Resources: It depends on the demand of the final goods and

services Marginal productivity theory:

The theory that businesses use resources based on how much extra profit these resources provide

Product and Resource Price-Taker:

Marginal Product: The change in output by adding/changing in input (worker) while all

other factors remain constant

Marginal revenue product: (MRP) the change in total revenue associated with employing each new

unit of a resource

Labour demand and supply: Marginal resource cost: (MRC)

the extra cost of each additional unit of resource

Business’s labour demand curve: a graph showing the possible combinations of workers demanded by a

business at each possible wage

Business’s labour supply curve: a graph showing the possible combinations of workers supplied to a

business at each possible wage

Profit-maximizing Employment Rule: states that a business should use a resource up to the point where the

resource’s marginal revenue product equals its marginal resource cost

Profit-Maximizing employment rule: MRP = MRC

Market Demand and Supply:

Labour market demand curve: A graph showing the possible combinations of workers demanded in a certain labour

market at each possible wage

Labour market supply curve: A graph showing the possible combinations of workers supplying their labour in a

certain labour market at each possible wage

Changes in Resource Demand:

Product Demand

Other Resource Prices Complementary Resources: resources that are used together Labour Productivity: the quantity of output produced per worker in a

given period of time; the average product of labour Substitute Resources: resources that can be used in place of one

another without affecting output

Technological Innovation Increase productivity

Price Elasticity of Resource Demand:

1. Rate of Decline in Marginal Product

2. Price Elasticity of Product Demand

3. Proportion of Total Costs

4. Substitute Resources