1. The Demand for Resources
RIXIE
AP Microeconomics
Unit 4, Day 1

2. Derived Demand
The demand for the factors of production is derived from the goods that they produce.
The demand for food truck chefs, food truck raw materials, and food truck permits exists because there is demand for food truck food!

3. Two Measures To Determine Resource use
Marginal Resource Cost (MRC)
Marginal Revenue Product (MRP)
The addition to a firm’s revenue when an additional input is employed
MRP = Change in Total Revenue / Change in # of Inputs
MRP = Marginal Revenue * Marginal Product
The additional cost to the firm from hiring an additional input like a worker or machine
MRC = Change in Total Resource Cost / Change in # of Inputs
In a competitive labor market, MRC = Wage

4. Profit-Maximizing Resource Employment
The profit-maximizing employer should hire to the point where MRP = MRC
Or, as close as possible to equal as long as MRP > MRC
(Similar to the MR = MC rule in the product market!)

5. MARGINAL REVENUE PRODUCT MARGINAL RESOURCE COST
UNITS OF LABOR
TOTAL PRODUCT
MARGINAL PRODUCT
MARGINAL REVENUE
(MR = P)
MARGINAL REVENUE PRODUCT
(MRP = MP x MR)
MARGINAL RESOURCE COST
(MRC = WAGE)
--- 1 25
$.50
$12.50
$7.50 2 45 20
.50
10.00
7.50 3 60 15 4 70 10
5.00 5 75
2.50 6 -5
-2.50 7
-10
-5.00

6. Graphical portrayal (Competitive wage market)$
Wage
Supply = MRC = Wage
Demand = MRP Q*
Q Labor

7. Determinants of resource Demand
1. Changes in the product demand
Increased demand for lemonade leads to an increased price of lemonade
This increases the MRP of resources, shifting the demand for those resources to the right, & increasing the quantity of labor employed

8. Determinants of resource Demand
2. Changes in productivity
Increases in efficiency (such as tech advances) can make a firm more profitable and give an incentive to employ more resources

9. Determinants of resource Demand
3. Changes in the prices of other resources
Substitute resources
If the price of farm machinery decreases relative to farm laborers, more machinery would be utilized, decreasing the MRP of farm labor (it would shift left)
Complementary resources
If the price of lumber used to build new houses decreases, more homes will be built, increasing the demand/MRP for construction workers (it would shift right)

10. Shift In resource demand$
Wage
Supply = MRC = Wage
D = MRP2
D = MRP1
Q*1
Q*2
Q Labor

11. Practice
State whether each of the following will increase or decrease the demand for the laborers, shift the demand curve to the left or right, and increase or decrease the quantity of labor employed.
The effect of an increase in popularity of gambling on the demand for workers at casinos
The effect of consumers decreasing their demand for food truck meals on the demand for food truck workers
The effect of developments in computer-assisted graphic design on the productivity of, and demand for, graphic artists
The effect of a decline in price of security equipment used by businesses to protect against illegal entry on the demand for night guards
The effect of a decline in price of cell phone equipment on the cost of cell phone service, and in turn on the demand for cell phone assemblers

12. Answers
State whether each of the following will increase or decrease the demand for the laborers, shift the demand curve to the left or right, and increase or decrease the quantity of labor employed.
Increase / Shift Right / Increase (increased price of service – increased MRP/demand for workers)
Decrease / Shift Left / Decrease (decreased price of product – decreased MRP/demand for workers)
Increase / Shift Right / Increase (increased efficiency)
Decrease / Shift Left / Decrease (substitute resources)
Increase / Shift Left / Increase (complementary resources)

13. Least-Cost Hiring Rule
Unit 4, Day 2 intro
(4/5 & 4/6)

14. Resource market: Least-Cost hiring rule
To minimize costs, a firm will adjust the ratio of inputs until the marginal product of labor divided by the price is equal to the marginal product of capital divided by price (L is labor & K is capital)
You will either be given the budget of the firm to spend on these resources, or the quantity of output they need to produce.
MPL PL
MPK PK
Does this sound familiar???

15. UNITS OF ROBOTS EMPLOYED UNITS OF LABOR EMPLOYED
MPK
(ROBOTS)
/ PK
UNITS OF LABOR EMPLOYED
MPL
(WORKERS)
/ PL 1 30 20 2 15 3 10 4 5
Each unit of robots costs $10 and each unit of workers costs $5. The firm has $35 to spend on these resources. Fill in the rest of the chart, and determine the cost-minimizing combination of resources to employ.

16. UNITS OF CAPITAL EMPLOYED UNITS OF LABOR EMPLOYED
MPK
/ PK
UNITS OF LABOR EMPLOYED
MPL
/ PL 1
100 50 2 90 40 3 80 30 4 60 20 5 45 10 6
Each unit of capital costs $10 and each unit of workers costs $5. The firm needs to produce 360 gadgets with these resources. Fill in the rest of the chart, and determine the cost-minimizing combination of resources to employ.