2. 12 - 1 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources The Demand for Resources

3. 12 - 2 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE

4. 12 - 3 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources RESOURCE PRICING Firms demand resources Land, labor, capital, & entrepreneurs Focus on labor

5. 12 - 4 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources RESOURCE DEMAND Derived demand Resource demand is derived from product demand Demand depends on Productivity of resource (MP) Price of product being made (P)

6. 12 - 5 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources RESOURCE DEMAND Marginal Resource Cost (MRC) MRC = ΔTotal (Resource) Cost Δ Resource Quantity MRP = Δ Total Revenue Δ Resource Quantity Marginal Revenue Product (MRP)

7. 12 - 6 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Optimal solution: MRP = MRC Resource Demand

8. 12 - 7 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) 0 1 2 3 4 5 6 7 8 Q W 14 12 10 8 6 4 2 Quantity of resource demanded Perfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] ] ] ] ] ] ] 0 0$2$ 0 Consider the case of resource demand under Perfect Competition

9. 12 - 8 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q W 14 12 10 8 6 4 2 Quantity of resource demanded Perfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0101 0 7 7 $2 2 $ 0 14 $ 14

10. 12 - 9 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q W 14 12 10 8 6 4 2 Quantity of resource demanded Perfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 012012 0 7 13 7676 $2 2 $ 0 14 26 $ 14 12

11. 12 - 10 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q W 14 12 10 8 6 4 2 Quantity of resource demanded Perfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 01230123 0 7 13 18 765765 $2 2 $ 0 14 26 36 $ 14 12 10

12. 12 - 11 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q W 14 12 10 8 6 4 2 Quantity of resource demanded Perfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0123456701234567 0 7 13 18 22 25 27 28 76543217654321 $2 2 $ 0 14 26 36 44 50 54 56 $ 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource

13. 12 - 12 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q W 14 12 10 8 6 4 2 Quantity of resource demanded Perfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0123456701234567 0 7 13 18 22 25 27 28 76543217654321 $2 2 $ 0 14 26 36 44 50 54 56 $ 14 12 10 8 6 4 2 The purely competitive seller’s demand for a resource Now, consider the case of resource demand under Imperfect Competition

14. 12 - 13 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q W 14 12 10 8 6 4 2 Quantity of resource demanded Imperfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0123456701234567 0 7 13 18 22 25 27 28 76543217654321 $2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65 $ 0 18.20 31.20 39.60 44.00 46.25 47.25 46.20 $ 18.20 13.00 8.40 4.40 2.25 1.00 -1.05 The imperfectly Competitive seller’s demand for a resource

15. 12 - 14 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Units of Resource Total Product (Output) Marginal Product (MP) Product Price Total Revenue Marginal Revenue Product (MRP) ] ] ] ] ] ] 0 1 2 3 4 5 6 7 8 Q W 14 12 10 8 6 4 2 Quantity of resource demanded Imperfect Competition MRP AS A DEMAND SCHEDULE ] ] ] ] ] ] 0123456701234567 0 7 13 18 22 25 27 28 76543217654321 $2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65 $ 0 18.20 31.20 39.60 44.00 46.25 47.25 46.20 $ 18.20 13.00 8.40 4.40 2.25 1.00 -1.05 The imperfectly Competitive seller’s demand for a resource More Inelastic Than PC

16. 12 - 15 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Optimal Combination of Resources All resource inputs are variable Choose an optimal combination –Minimize cost –Maximize profit

17. 12 - 16 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources The Least Cost Rule Minimize cost of producing a given output Last dollar spent on each resource yields the same marginal product MP of Labor (MP L ) Price of Labor (P L ) MP of Capital (MP C ) Price of Capital (P C ) =

18. 12 - 17 Significance of Resource Pricing Marginal Productivity Theory of Resource Demand MRP as a Demand Schedule Determinants of Resource Demand Optimum Combination of Resources Profit Maximizing Rule MRP of each resource equals its price MRP L PLPL MRP C PCPC = = 1 MRP L PLPL = MRP C PCPC = and