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significant reasons for studying resource pricing

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1. prices and resources i.e land, labor, capital entrepreneurial ability paid as wages, rent, interest and profit thus determine nominal incomes 2. prices of resources for resources allocate scarce resources among competing uses in a market economy

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why study resource pricing

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3.expenditures of resources are cost to businesses. businesses are continually seeking to minimize the cost of production 4.there are major policy issues related to resource pricing such as minimum wage laws, interest rate ceilings and taxation resources

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derived demand

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depends on the demand for the goods and services that the resource can produce.eg, demand for workers in a computer industry depends on the demand for computers

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demand for a resource depends on

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1.marginal productivity of the resources 2.demand of a resource depends on the price of the product that the resource produces two factors related through concept or marginal revenue product which is the basis for the resource demand curve

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in pure competition

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marginal revenue product for an additional unit of a resource is simply the marginal productivity of the resource multiplied by the price

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two key factors that determine strength of demand

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productivity of a resource to produce a good or service and the market value of the good or service it helps produce. these factors help determine the level of demand in that a resource that is highly productive and whose end product has a high market value will have a high demand. a resource that faces low productivity and whose end product faces a low market value will have a low demand.

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profit-maximizing condition for use of a resource

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occurs when MRP and the MRC are equal. when they are equal, an additional unit of the resource would cause a greater increase in cost thaN in revenue and a unit less would result in revenue being greater that the cost of that reduced unit, producing incentive to increase production. In both cases, costs could be minimized and revenues maximized by moving the quantity to the level where MRP=MRC thus maximizing profit.

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resources

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labor, land, capital and entrepreneurial ability are paid as rent, wages, interest and profit and thus determine nominal incomes.

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why people earn the incomes they do

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requires understanding in how resource prices are determined. Prices for resources allocate scarce resources among competing uses in the market economy. efficient allocation of resources requires shifting resources to their highest valued use in a dynamic economy.

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expenditure for resources

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are costs to business, businesses are continually seeking to minimize the cost of production. There are major policy issues related to resource pricing such as minimum wage laws, interest rate ceiling and taxation resources

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demand for resources

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called derived demand coz it depends on the demand of goods and services that the resources can produce e.g. demand for workers in a comp industry depends demand for computers

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demand for resources critical factors

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1. demand for resources depends on marginal productivity of the resource 2.resource for demand depends on price of the product that the resource produces, the 2 factors are related through concept of marginal revenue product which is the basis of resource demand curve

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in pure competition marginal revenue product

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for an additional unit of a resource is simply the marginal productivity of the resource multiplied by product price

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2 factors that determine the strength of demand

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productivity of a resource to produce a good or service and the market value of the good or service it helps produce, these factors help determine the level of demand, in that a resource that is highly productive and whose end product has a high market value will have a high demand

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a resource that faces low productivity

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and whose end product faces a low market value will have a low demand

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profit maximizing condition for resource use

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occurs when marginal revenue product and marginal resource cost are equal. When they are equal, an additional unit of the resource would cause a greater increase in cost than in revenue and a unit less would result in revenue being greater than the cost of that reduced unit, producing incentive to increase production. In both cases, the costs could be minimized and revenues maximized by moving the quantity to the level where MRP=MRC thus maximizing profit

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American high wage earning

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no inherent superiority among American workers. -they have larger amounts of capital per worker, abundance in natural resources, high level of technology, health,education, training and work attitudes and a stable business environment

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marginal resource cost exceed

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the wage rate in the case of the monopsonistic firm.(large employer of a particular type of labor) . as thee monopsonist seeks to obtain more workers ,he must raise the wage rate for all workers or else labor morale will be low.

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when increased wage rate is paid to all workers

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marginal resource cost will diverge from wage rate coz those previously hired at lower wage rates must now be compensated at the new hire wage, this amount makes the marginal cost of hiring a new worker more than the wage rate for that worker

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MRC exceeding wage rate

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example, 1st worker higher by firm was paid $6 an hour, then the MRC of the first worker would be 6. if the next worker hired require $7 to be hired, then the 2nd worker would cost a $7 an hour; however, another $1an hour would have to be paid to the first worker thus the marginal resource cost of the 2nd worker would be $8 an hour instead of just $7. wage rate and MRC diverge as the second worker is hired by the monopsonist

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exclusive union (craft union)

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uses licensing and other means to restrict entry into union by controlling the supply of members who are typically skilled workers. the union can raise the wages of its members. decrease in the supply of workers results in the loss of employment for workers who are not licensed or union members

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inclusive union

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industrial union includes workers who are both skilled and unskilled who work in an industry. inclusive union tries to raise wages by bargaining for a higher wage rate for all workers in the industry, the higher the wage rate, the less people hired in the industry.

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bilateral monopoly

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a strong industrial union negotiates with a monopsony a "seller" of labor must negotiate with a monopolistic "buyer" of labor. the outcome from such negotiations is indeterminate in terms of the wage rate and the quantity of labor hired. monopsonist employer will ask for below competitive equilibrium wage rate. the outcome is unpredictable. result is most likely determined by relative strength of the bargaining power for one side or another

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bilateral monopoly for society

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may be socially desirable in some respects, on the buy side might cancel the monopoly power on the sell side thus producing an outcome in terms of wage rates and levels if employment that is close to what would be if there was a competitive market

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principle agent of job performance

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occurs when the interest of agents diverge from the interest of the principle.. workers-agents, principle-firm. Shirking on the job is an example coz workers would be paid for less than their desired level of performance

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shirking can be reduced by

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monitoring, but its too costly, as a consequence, firm adopt worker incentive plans to tie worker compensation more closely to job performance

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worker performance schemes

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incentive schemes that tie pay directly to performance such as piece rate compensation, commissions and royalties or bonuses, stock options and profit sharing 2.efficiency wages that get extra effort out of workers by paying them above average wages for the type of work performed.

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in a competitive product market

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firm is a price taker and can dispose off as little or as much output as it chooses at market price. thus a firm selling a negligible fraction of the total output that its output decision exert no influence on product price. similarly the firm is also a price taker or wage taker in the competitive resource market.

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resource demand

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is a schedule or curve showing the amounts of a resource that buyers are willing to and able to purchase at various prices at some period of time. critically resource demand is derived demand.

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a resource demand curve

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will shift because of the changes in product demand , changes in productivity of the resource , and the changes in the prices of other inputs

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if resources A and B are substitutable

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a decline in the price of A will decrease the demand for B provided the substitution effect exceeds the output effect, but if the output effect exceeds the substitution effect, the demand for B will increase.

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if resources C and D are complements

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a decline in the price of C will increase the demand for d

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elasticity of resource demand

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measures the extent to which producers change the quantity of a resource they hire when its price changes

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the elasticity of resource demand

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will be less the greater the difficulty of substituting other resources for the resource. the smaller the elasticity of product demand, and the smaller the proportion of total cost accounted for by the resource.

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resource prices

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help determine money incomes, and the simultaneously ration resources to various industries and firms

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MRP curve of any resource

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its the demand curve for that resource because the firm equates resource price and MRP in determining its profit maximizing level of resource employment.

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firms demand curve for a resource

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slopes downwards because the marginal product of additional units declines in accordance with the law of diminishing returns, when a firm is selling in a imperfectly competitive market, the resource demand curve falls for a 2nd reason, product price must be reduced for the firm to sell a larger output

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market demand curve for a resource

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is derived by summing horizontally the demand curves of all the firms hiring that resource.

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the demand curve of a resource

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will shift as a result of 1. a change in the demand for, and therefore price of the product the resource is producing. 2. changes in the productivity of a resource 3. changes in the prices of other resources

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profit maximizing condition for use of a resource

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occurs when MP and MRC are equal. when equal, an additional unit of the resource causes a greater increase in cost than revenue & a unit less results in revenue being greater than cost of the reduced unit, producing incentive to increase production. in both cases cost would be minimized and revenues maximized by moving the quantity to the level where MRP=MRC MAXIMIZING profit.

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prices paid for resource effect

answer

-the money incomes of households in the economy -allocation of resources and among different firms and industries in the economy -quantities of different resources employed to produce a particular product

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study of pricing of resources

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tends to be difficult because the basis principle of resource pricing must be varied and adjusted when applied to particular resource markets

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demand for resources is derived from

answer

marginal productivity of a resources and the price of a good or service produced from it

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law of diminishing returns

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explains why MRP of an input in a purely competitive market decreases as a firm increases the quantity of an employed resource

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real wage is equal to

answer

quantity of quantity of goods and services purchased

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factors that influence productivity

answer

capital, labor quality and technology

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supply and wage rate

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in a competitive labor market, the marginal resource cost of a firm is also its supply and wage rate

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the labor supply curve of each firm

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is perfectly elastic in a competitive labor market

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as a firm sells product in an imperfectly competitive market

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and increases the quantity of the resource it employs , the marginal revenue product of that resource falls because both the marginal product and price at which the firm sells the product fall

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increase in productivity of a resource

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will increase a firms demand for a particular resource

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substitution effect

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that a firm will use indicates that a firm will use more of an input whose relative price has decreased

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suppose resource A and resource B are substitutes and the price of A increases

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if the output effect is greater than the substitution effect the quality of A and B employed by the firm will decrease

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increase in the demand of labor

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occurs when two resource inputs, capital and labor are complementary and used in fixed proportions

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increase in the percentage of a firms total cost account for by the resource

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would result in an increase in the elasticity of demand for a particular resource

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demand of labor

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would most likely become more inelastic as a result of an increase in the rate at which marginal revenue product decline

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a firm allocating its expenditure for a resource

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in a way that results in least total cost of producing any given output when the marginal product per dollar spent on the last unit of a resource is the same

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firm that hires resource in a purely competitive market

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is not minimizing its profits when the marginal revenue product of every resource is equal to.-=-= is also employing the combination of resources that will result in maximum profits for the firm when the marginal revenue product of every resource is equal to its price

question

in the marginal productivity theory of income distribution

answer

when all markets are purely competitive ,each unit of each resource receives a money payment equal to its marginal revenue product

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major criticism of marginal productivity theory of income distribution

answer

is that ;labor markets are often subjected to imperfect competition

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resource prices allocate

answer

resources and is the one factor that determines household incomes and business costs

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demand for a resource

answer

is derived productivity demand that depends on productivity of the resource and the price of that resource

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firm finds it profitable to hire

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units of a resource where the quantity at which marginal revenue product equals marginal revenue cost

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if firm hires the resource in a purely competitive market

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the marginal resource cost will be equal to the price of the resource

question

a firms demand schedule for a resource

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is the firms marginal revenue product schedule for that resource because both indicate the quantities of the resource the firm will employ at various resource prices

question

a producer in a imperfectly competitive market

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finds that the more of a resource it employs the lower becomes the price at which it can sell its product, as a consequence, the demand schedule of a resource is less elastic than it would be if the output were sold in a purely competitive market

question

demand for a resource will change if

answer

demand for the product the resource produces changes, if the productivity of a resource changes, or if the price of the other product changes

question

if the demand for a product increases

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the demand for the resource that produces that product will increase, conversely if the demand for a product decreases, the demand for the resource that produces that product decreases

question

when productivity of a resource falls

answer

the demand for the resource falls, but when the productivity of a resource rises, the demand for the resource rises

question

if output of a firm is constant

answer

a decrease in the price of the resource A will induce the firm to hire more of a resource A and less of other resources, this is called the substitution effect . But if the decrease in the price of A results in lower total costs and an increase in output the firm may hire more of both resources, called the substitution out put effect

question

Decrease in price of a complementary resource

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will cause the demand for labor to increase and ,but an increase in the price of a complementary resource will cause the demand for labor to decrease

question

determinants of price elasticity of demand for a resource

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are the ease with which other resources can be substitutes for it, the price elasticity of demand for the product the resource produces and the ratio of resource cost to total demand cost

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marginal product of labor declines slowly when

answer

added to a fixed stock of capital, the demand curve for labor MRP will decline slowly and will tend to be highly elastic

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the greater the suitability of other resources for a resource

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the greater will be the elasticity of demand for that resource

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if firm employs resources in a purely competitive market

answer

if firm wishes to produce any amount of output in the least costly way, the ration of the marginal product to each resource to its price must be same for all resources

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if the marginal revenue product of a resource is equal to the price of that resource

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the marginal revenue product divided by it's price is equal to

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marginal productivity theory rests on the assumption of

answer

competitive markets, in the real world, there are many labor markets with imperfections because of employer pricing or monopoly power, so wage rates and other resource prices do not perfectly measure contributions to domestic output

question

in the resource market of economy

answer

resources are demanded by business firms and supplied by households -prices of a resource are an important fact in determining the resource allocation, demand for a resource is derived demand based on the demand for the product it produces

question

where MRP of labor =MRC

answer

will it be profitable for a firm to hire additional units of labor resources

question

a producers demand schedule for a resource

answer

will be more elastic if the firm sells its product in a purely competitive market than it would be if sold the product in an imperfectly competitive market

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market demand for a particular resource

answer

is the sum of the individual demands of all firms that employ that resource

question

demand curve for labor will increase when

answer

the demand for and price of the product produced by that labor increases -demand for a resource will be increased with improvements in its quality -if two resources are complementary , an increase in the price of one will reduce the demand for the other

question

price declines for computer equipment

answer

have had stronger output effects the substitution effects increasing the demand for computer software engineers and specialists

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the greater the elasticity of product demand

answer

the greater the elasticity of resource demand

question

demand for labor will be less elastic

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when labor is a smaller proportion of the total cost of producing a product

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if a firm wishes to maximize profits

answer

it should increase its employment of both A and B until their marginal revenue product falls to $2 and $5 respectively

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