CHAPTER 11
RESOURCE MARKETS
In this chapter, you will find:
Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignment
LEARNING OUTCOMES
11-1 Determine the profit-maximizing number of workers for a firm to hire.
11-2 Explain why resource owners are more willing and more able to increase the quantity supplied
of the resources they own as resource prices increase.
11-3 Explain why some resource price differences are temporary while others are permanent.
People supply their resources to the highest-paying alternative, other things constant. Because other
things are not always constant, people must be paid more for jobs less suited to their tastes. Your
11-4 Clarify the distinction between a resource’s opportunity cost and its economic rent.
Opportunity cost is what a resource could earn in its best alternative use. Economic rent is the portion
11-5 Describe the economic logic of optimal resource use.
The marginal revenue product of any resource is the change in the firm’s total revenue resulting
from employing an additional unit of the resource, other things constant. The marginal resource cost
is what an additional unit of a resource will cost the firm. The profit-maximizing level of resource
employment occurs where the respective marginal revenue products equals the marginal resource
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INTRODUCTION
This chapter provides an overview of resource markets, giving special attention to the labor market. The
intent is to show that the basic decision about how much of a resource to supply or demand is relatively
chapters, which examine specific resources.
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-3 FOR THE FOLLOWING SECTION
Resource Demand: A firm demands additional units of a resource as long as the marginal revenue
and utility-maximizing goals of households are sorted out through voluntary exchange in markets.
USE POWERPOINT SLIDES 4-5 FOR THE FOLLOWING SECTION
The Market Demand for Resources: The demand for a resource is derived from the demand for the
product the resource produces.
USE POWERPOINT SLIDE 6 FOR THE FOLLOWING SECTION
The Market Supply for Resources: Resource suppliers are more willing and more able to increase
quantity supplied as the resource price increases.
USE POWERPOINT SLIDES 7-9 FOR THE FOLLOWING SECTION
Temporary and Permanent Resource Price Differences: As long as nonmonetary benefits are identical
and resources are freely mobile, resources adjust across uses until they earn the same in different uses.
USE POWERPOINT SLIDES 10-14 FOR THE FOLLOWING SECTION
Opportunity Cost and Economic Rent: Opportunity cost is what the resource could earn in its best
alternative use. Economic rent is that portion of a resource’s total earnings that exceeds the amount
necessary to keep the resource in its present use.
• Resource Market A: All Earnings Are Economic Rent—In a perfectly inelastic market,
resources have no alternative use so all earnings are economic rent. Fixed supply determines
USE POWERPOINT SLIDES 15-19 FOR THE FOLLOWING SECTION
A Closer Look at Resource Demand
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161
The Firm’s Demand for a Resource: As a firm hires more of a resource, the marginal product of that
resource declines, reflecting the law of diminishing returns.
Marginal Revenue Product: The change in total revenue when an additional unit of a resource is hired,
USE POWERPOINT SLIDES 20-21 FOR THE FOLLOWING SECTION
Marginal Resource Cost: The change in total cost when an additional unit of a resource is hired, other
things constant. Firms hire more resources as long as doing so adds more to revenue than to cost. Firms
stop hiring when MRP=MRC.
USE POWERPOINT SLIDES 22-25 FOR THE FOLLOWING SECTION
Changes in Resource Demand
• Change in Other Resources Employed: Changes in the price of resource substitutes affect demand
for resources. If two resources are substitutes, an increase in the price of one increases demand for
CHAPTER SUMMARY
Firms demand resources to maximize profits. Households supply resources to maximize utility. The profit-
maximizing goals of firms and the utility-maximizing goals of households are reconciled through
voluntary exchange in resources markets.
Some differences in the market prices of similar resources trigger the reallocation of resources to equalize
those prices. Other price differences do not cause a shift of resources among uses because of a lack of
resource mobility, differences in the inherent quality of the resources, differences in the time and money
involved in developing necessary skills, and differences in nonmonetary aspects of jobs.
Chapter 11 Resource Markets 162
A firm’s demand curve for a resource is the resource’s marginal revenue product curve, which shows the
firm’s change in total revenue from employing one more unit of the resource, other things constant. If a
firm sells output in a competitive market, the marginal revenue product curve slopes downward because of
diminishing marginal returns. If a firm has some power in the product market, the marginal revenue
product curve slopes downward both because of diminishing marginal returns and because the product
price must fall to sell more.
TEACHING POINTS
1. This chapter is important because it provides the foundation for understanding different resource
markets. Later chapters deal with markets for particular resources, such as labor or capital. The
2. There are two parts to the initial discussion of resource markets. The first is the distinction
between temporary and permanent resource price differences, and the second is the distinction
3. This distinction may spark interest in discussing circumstances in which differentials seem to be
permanent but not explainable by differences in nonmonetary job attributes or employee training
or skills. You may wish to defer such discussion until the next chapter.
4. The total remuneration of a resource is divided into two categories—economic rent and opportuni-
ty cost. Economic rent is a type of producer’s surplus because it equals the amount of income re-
5. The second part of the chapter is devoted to explaining the derivation of resource demand by
use of marginal productivity and marginal revenue. After students feel comfortable with the marginal
product curve, it is not hard to move on to the marginal revenue product curve. For competitive
product markets, marginal product multiplied by the market price of output yields marginal revenue
product.
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6. Students should realize that the demand for a resource can change in two basic ways. The first oc-
curs when the price (or marginal revenue) of output changes. The second occurs when the marginal
productivity curve of the resource shifts.
7. It is easy to become lost in the details of resource market analysis and fail to make the essential
point to the students: Firms are willing to hire an additional unit of a resource only if that unit can
8. You may wish to extend the discussion of optimal resource use with more than one resource. With
a little algebra, you can show that the rule that each resource is used to the point where the marginal
SOLUTIONS TO PROBLEMS APPENDIX
1. (Resource Demand) How do firms and individuals determine if it’s worth it to (a) invest in
capital improvements, (b) hire additional workers, or (c) decide where to work?
It is worth it for a firm to invest in capital improvements when those improvements will bring
2. (Profit Maximization) What is a firm’s profit maximizing rule in deciding how many workers to
hire?
The profit maximizing number of workers to employ exists at that quantity in which the last
3. (Market Supply for Resources) Explain why the market supply curve of a resource slopes upward.
4. (Resource Demand and Supply) Answer each of the following questions about the labor market:
a. Which economic decision makers determine the demand for labor? What is their goal, and
what decision criteria do they use in trying to reach that goal?
b. Which economic decision makers determine the supply of labor? What is their goal, and
what decision criteria do they use in trying to reach that goal?
c. In what sense is the demand for labor a derived demand?
Chapter 11 Resource Markets 164
a. Firms determine the demand for labor. To maximize profit, they hire additional units of
labor as long as the marginal revenue generated by the extra labor exceeds the marginal
5. (Resource Price Differences) Distinguish between how the market reacts to a temporary dif-
ference in prices for the same resource and how the market reacts to a permanent difference
for
similar resources. Why do the reactions differ?
Temporary differences in resource prices might differ across markets because adjustment
takes time. But when resource markets are free to adjust, these temporary price differences
6. (Opportunity Cost and Economic Rent) Define economic rent. In the graph below, assume that
the market demand curve for labor is initially D1.
a. What are the equilibrium wage rate and employment level? What is the economic rent?
b. Next assume that the price of a substitute resource increases, other things constant. What
happens to demand for labor? What are the new equilibrium wage rate and employment
level? What happens to economic rent?
c. Suppose instead that demand for the final product drops, other things constant. Using labor
demand curve D1 as your starting point, what happens to the demand for labor? What are the
new equilibrium wage rate and employment level? Does the amount of economic rent
change?
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7. (Firm’s Demand for a Resource) Use the following data to answer the questions that follow.
Assume a perfectly competitive product market.
Units of Labor Units of Output
0 0
1 7
2 13
3 18
4 22
5 25
a. Calculate the marginal revenue product for each additional unit of labor if output sells for $3
per unit.
b. Draw the demand curve for labor based on the above data and the $3 per unit product price.
c. If the wage rate is $15 per hour, how much labor will be hired?
d. Using your answer to part (c), compare the firm’s total revenue to the total amount paid for
labor. Who gets the difference?
e. What would happen to your answers to parts (b) and (c) if the price of output increased to
$5 per unit, other things constant?
a. Marginal revenue product equals marginal revenue (price) times marginal product.
Chapter 11 Resource Markets 166
b.
c. Hiring to the point where marginal revenue product equals marginal resource cost means
8. (Shifts of Resource Demand) A local pizzeria hires college students to make pizza, wait on
tables, take phone orders, and deliver pizzas. For each situation described, determine whether
the demand for student employees by the restaurant would increase, decrease, or remain
unchanged. Explain each answer.
a. The demand for pizza increases.
b. Another pizzeria opens up next door.
c. An increase in the minimum wage raises the cost of hiring student employees.
d. The restaurant buys a computer system for taking phone orders.
a. Demand increases. Labor demand is derived from the demand for pizza. As more pizzas are
9. (Selling Output as a Price Taker) If a competitive firm hires another full-time worker, total
output increases from 100 units to 110 units per week. Suppose the market price of output is $25
per unit. What is the maximum weekly wage at which the firm would hire that additional
worker?
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Answering this question requires computing the marginal revenue product that brings about
Experiential Assignment
1. The Occupational Outlook Handbook (OOH) is a U.S. Department of Labor publication that pro-
jects employment trends, found at http://www.bls.gov/ooh/. Have students research several occupa-