Resource Markets CHAPTER 15 © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE.

Resource Markets © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. Resource market: a market that provides one of the resources for producing goods and services: labor, capital, land. ◦Rent and quantity of land used are determined in the land market ◦The wage rate and the number of people employed are determined in the labor market ◦The interest rate and the quantity of capital used are determined in the capital market

© 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. Firms and Households In resource markets, the roles of firms and households are reversed from what they are in the product markets. Households are the sellers of resources, and firms are the buyers of resources.

The Market for Resources © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE.

Derived Demand © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. Resources are not wanted for themselves, but rather for what they can produce. The demand for resources is a derived demand—it is driven by the firms’ needs in order to supply goods and services to the goods and services markets.

The Firm’s Demand © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. Firms maximize profit when they operate at the level where marginal revenue (MR) equals marginal cost (MC). For resource markets, MR is called the marginal revenue product, MRP, and MC is called the marginal factor cost, MFC. Marginal revenue product (MRP): the additional revenue that an additional resource can create for a firm. Marginal factor cost (MFC): the additional cost of an additional unit of a resource.

Market Demand © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. The demand curve for a resource slopes downward because as the price of a resource falls, everything else constant, producers are more willing and able to use that resource instead of others. This is the law of diminishing marginal product.

Resource Market Demand and Market Supply © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE.

Marginal Factor Cost © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. The marginal factor cost (MFC) is the cost of an additional unit of resource. Resources will be employed up to the point at which MRP=MFC. Until this point, additional units of resource produce more revenue than they cost—they add to profits.

Hiring Resources in a Perfectly Competitive Market © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. If the firm is purchasing resources in a market where there is a very large number of suppliers of an identical resource—a perfectly competitive resource market—the price of each additional unit of the resource to the firm is constant.

The Employment of Resources © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE.

Monopsony © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. A monopsonist is a firm that is the only buyer of a resource. In the early days of the U.S., many towns sprung up around a single firm which was essentially the only employer in the town. This allowed the firm enormous market power in terms of wage setting and hiring practices. A monopsony firm is able to pay resources less than their MRPs.

McDonald’s a Monopsony? © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. McDonald’s is the largest single purchaser of American beef, buying nearly one billion pounds per year. McDonald’s operates 30,000 restaurants in 120 countries and employees over 12 million workers.

When Hiring More than One Resource © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. At equilibrium, the last dollar spent on resource must yield the same marginal revenue product no matter what resource the dollar is spent on. If a resource is very expensive relative to other resources, it must generate a significantly larger MRP than the other resource.

Product Market Structures and Resource Demand © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. Firms purchase the types and quantities of resource services that allow them to maximize profit. Each firm equates the MRP per dollar of expenditure on all resource services used. The MRP depends on the market structure in which the firm sells its output. A perfectly competitive firm will hire and acquire more resources than firms selling in monopoly, oligopoly, or monopolistically competitive product markets.

Resource Supplies © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. Households supply resources in order to maximize utility. The quantity of resources that are supplied depends on the wages, rents, interest, and profits offered for those resources.

Economic Rent © 2016 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE COPIED, SCANNED, OR DUPLICATED, IN WHOLE OR IN PART, EXCEPT FOR USE AS PERMITTED IN A LICENSE DISTRIBUTED WITH A CERTAIN PRODUCT OR SERVICE OR OTHERWISE ON A PASSWORD-PROTECTED WEBSITE FOR CLASSROOM USE. When a resource has a perfectly inelastic supply, its pay or earnings is called economic rent. If a resource has a perfectly elastic supply curve, its pay or earnings is called transfer earnings, what a resource could earn in its best alternative use. It is the amount that must be paid to get the resource to “transfer” to another use. Economic rent is earnings in excess of transfer earnings.