1. The Demand
for Resources
27C H A P T E R

2. MARGINAL PRODUCTIVITY
THEORY OF RESOURCE DEMAND
Derived Demand – The
Demand for a resource
that depends on the
demand for the
products it helps to
produce

3. Marginal Revenue Product
(MRP) = The chance in a firm’s
total revenue when it employs
1 additional unit of a resource
Marginal
Revenue
Product
=
Change in
Total Revenue
Unit change in
Resource Quantity

4. MARGINAL PRODUCTIVITY
THEORY OF RESOURCE DEMAND
Rule for Employing
Resources:
MRP = MRC
Marginal
Resource
Cost
=
Change in Total (Resource) Cost
Unit change in Resource Quantity

5. Percentage of Labor Force
0 25 50 75 100
Developing
Countries
Industrially
Advanced
Countries
United
States
Agriculture
Agriculture
Agriculture
Industry
Industry
Industry
Services
Services
Services
GLOBAL PERSPECTIVE
Labor Demand and Allocation:
Selected Nations
Source: International Labour Organization

6. 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
P 14
12
10
8
6
4
2
Resourceprice
(wagerate)
Quantity of resource demanded
Pure Competition
MRP AS A DEMAND SCHEDULE
]
]
]
]
]
]
]
]
]
]
]
]
0 0 $2 $ 0
Consider the case of
resource demand under
Pure Competition

7. 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
P 14
12
10
8
6
4
2
Resourceprice
(wagerate)
Quantity of resource demanded
Pure Competition
MRP AS A DEMAND SCHEDULE
]
]
]
]
]
]
0
1
0
7
7
$2
2
$ 0
14
$ 14

8. 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
P 14
12
10
8
6
4
2
Resourceprice
(wagerate)
Quantity of resource demanded
Pure Competition
MRP AS A DEMAND SCHEDULE
]
]
]
]
]
]
0
1
2
0
7
13
7
6
$2
2
2
$ 0
14
26
$ 14
12

9. 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
P 14
12
10
8
6
4
2
Resourceprice
(wagerate)
Quantity of resource demanded
Pure Competition
MRP AS A DEMAND SCHEDULE
]
]
]
]
]
]
0
1
2
3
0
7
13
18
7
6
5
$2
2
2
2
$ 0
14
26
36
$ 14
12
10

10. 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
P 14
12
10
8
6
4
2
Resourceprice
(wagerate)
Quantity of resource demanded
Pure Competition
MRP AS A DEMAND SCHEDULE
]
]
]
]
]
]
0
1
2
3
4
5
6
7
0
7
13
18
22
25
27
28
7
6
5
4
3
2
1
$2
2
2
2
2
2
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

11. 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
P 14
12
10
8
6
4
2
Resourceprice
(wagerate)
Quantity of resource demanded
Pure Competition
MRP AS A DEMAND SCHEDULE
]
]
]
]
]
]
0
1
2
3
4
5
6
7
0
7
13
18
22
25
27
28
7
6
5
4
3
2
1
$2
2
2
2
2
2
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

12. 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
P 14
12
10
8
6
4
2
Resourceprice
(wagerate)
Quantity of resource demanded
Imperfect Competition
MRP AS A DEMAND SCHEDULE
]
]
]
]
]
]
0
1
2
3
4
5
6
7
0
7
13
18
22
25
27
28
7
6
5
4
3
2
1
$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

13. Big Ideas about Factor,
or Resource Markets
 The economic concepts are similar
to those for product markets
 The demand for a factor of
production is derived from the
demand for the good or service
produced from this resource.

14. Big Ideas about Factor,
or Resource Markets
 A firm tries to hire additional units of
a resource up to the point where
the resource’s marginal revenue
product (MRP) is equal to its
marginal resource cost (MRC)
 In hiring labor, a perfectly
competitive firm will do best if it
hires up to the point where MPR =
the wage rate. Wages are the

15. Big Ideas about Factor,
or Resource Markets
 If You Want a High Wage:
a. Make something people will pay a lot
of $ for.
b. Work for a highly productive firm.
c. Be in relatively short supply
d. Invest in your human capital
 Real wages depend on productivity
 Productivity depends on real or
physical capital, human capital, labor
quality and technology.

16. ELASTICITY OF RESOURCE DEMAND
Ease of Resource
Substitutability
Elasticity of Product Demand
Ratio of Resource Cost to
Erd = Percentage change in resource price
Percentage change in resource quantity
Erd > 1 is Elastic
Erd = 1 is Unit-Elastic
Erd < 1 is Inelastic

17. OPTIMUM COMBINATION
OF RESOURCES
Least-Cost Rule
Profit-Maximizing Combination
MP of Labor MP of Capital
Price of Labor Price of Capital
MRPL
PL
MRPC
PC
1
Least-Cost Combination of Resources

18. MARGINAL PRODUCTIVITY THEORY
OF INCOME DISTRIBUTION
Inequality
Market
Imperfections

19. derived demand
marginal product (MP)
marginal revenue product (MRP)
marginal resource cost (MRC)
MRP = MRC rule
substitution effect
output effect
elasticity of resource demand
least-cost combination of resources
profit-maximizing combination of resources
marginal productivity theory of income distribution
ENDBACKCopyright McGraw-Hill/Irwin, Inc. 2005

20. Wage
Determination
Chapter 28
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