Resource Markets

Resource Markets

1. Resource Demand

   • As long as the additional revenue from emplying another worker exceeds the additional cost, the firm should hire that worker.
   • Producer demands another unit of a resource as long as its marginal revenue exceeds its marginal cost.
   • Derived Demand - Demand that arises from the demand for the product the resource produces.
   • A lower price for a resource also increases a producer's ability to hire that resource.

2. Resource Supply

   • People supply their resources to the highest-paying alternative, other things constant.
   • Resource suppliers are more willing and more able to increase quanitity supplied as the resouce price increases.

3. Demand and supply for resource depend on the willingness and ability of buyers and sellers to engage in market exchange.

4. Temporary and Permanent Resource Price Differences

   • As long as the nonmonetary aspects 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.
   • Some price differences are temporary because they spark shifts of resource supply away from lower-paid uses and toward higher-paid uses.
   • Permanent price differences are expained by a lack of resource mobility, differences in the inherent quality of the resource, differences in the time and money involved in developing the necessary skills, or differences in non-monetary aspects of the job (lifeguard vs prison guard).

5. Economic Rent - portion of a resource's total earnings that exceeds its opportunity cost; earnings greater than the amount required to keep the resource in its present use.

6. Marginal Revenue Product - The change in total revenue when an additional unit of a resource is employed, other things constant.

   • Marginal revenue product depends on how much additional output resource produces and at what price that output is sold.
   • For firms selling with some market power, the maginal revenue product curve slopes downward both because of diminishing marginal returns and because additional output cna be sold only if the price falls.
   • can be thought of as the firm's demand curve for that resource.
   • Two things that can change a resource's marginal product.
     • A change in the amount of other resources employed
       • Resource Substitutes - Resources that substitute in production; an increase in the price of one resource increaes the demand for the other.
       • Resource complements - Resources that enhance one another's productivity; a decrease in the price of one resource increases the demand for the other.
     • A change in technology
       • Technological improvements can boost the productivity of some resources but make other resources obsolete.

7. Marginal Resource Cost - The change in total cost when an additional unit of a resource is hired, other things constant.

   • Firm hires additional workers until Marginal Revenue product = Marginal resource cost. The profit maximizing level of employment occurs when above stated is true.