Chapter 25 (12 Micro)
1. Introduction
A. Productive assets are bought and sold in resource markets.
B. These markets help determine what is produced, how it is produced, and the
distribution of income.
II. Human and Nonhuman Resources
A. Human and Nonhuman Resources
1. There are two classes of productive resources:
a. Nonhuman resources.
(1) Physical capital.
(3) Natural resources.
b. Human resources.
2. Investment in human capital refers to activities that increase the human capital and
3. Human resources differ from nonhuman resources:
(1) Only their labor services can be sold.
III. The Demand for Resources
A. Demand for Resources
1. The demand for resources is derived from the demand for the products that the
2. The quantity demanded of a resource is negatively related to its price for two reasons:
a. Substitution in production.
(2) The more substitute resources are available, the more elastic is the demand
b. Substitution in consumption.
(1) A higher resource price will raise the product price and consumers will
(2) The more elastic the demand for the product, the more elastic is the demand
for the resource.
B. Time and the Demand for Resources
C. Factors Shifting Resource Demand Curves
1. A change in the demand for a product will cause a similar change in resource
demand.
3. A price change of a related resource will affect demand for the original resource.
a. A rise in the price of a substitute resource will raise demand for the resource.
b. A rise in the price of a complement resource will lower demand for the
resource.
IV. Marginal Productivi
A. Hiring Decision
1. Profit-maximizing firms will hire additional units of a resource up to the point
where the marginal revenue product of the resource equals its price.
a. Marginal revenue product (MRP) is the change in total revenue that results
from the employment of an additional unit of a resource.
B. Multiple Inputs
2. Wage differentials reflect skill differentials.
3. When real world decision makers minimize per unit costs, the outcome will be as if
V. The Supply of Resources
A. Supply of Resources
1. The amount of a resource supplied is directly related to its price.
3. In the long run, investment can increase the supply of both physical and human
resources.
B. Time and the Elasticity of Supply for Resources
VI. Supply, Demand, and Resource Prices
A. Resource Prices
1. The prices of resources are determined by supply and demand.
2. Changes in the market prices of resources will influence the decisions of both users
and suppliers.
Chapter 25 (12 Micro)/The Supply and Demand for Productive Resources 241
B. Equilibrium in a Resource Market
C. Changes in Resource Prices
2. Profit is a reward for the entrepreneur who is able to see and act on opportunities to
put resources to higher valued uses.
D. Adjusting to Dynamic Change
VII. The Coordinating Function of Resource Prices
A. Resource prices coordinate the actions of the firms demanding factors of production
and the households supplying them.
1. Resource prices provide users with both information about the scarcity of the
OBJECTIVES
In this chapter, we outline the theory of price and input utilization for resource markets. Supply and
demand form the core of the analysis. When the price of a resource declines, the amount of the input
employed will increase for two reasons. First, at the lower price, firms will substitute the input
(which is now relatively cheaper) for other resources. Second, the lower input price will also reduce
down the market price of the product and leads to an increase in the output of the product. The
expansion in output will require an increase in the utilization of all inputs, including the one that
declined in price.
Whereas the decisions of producers and marginal productivity underlie the demand curve for
the input, the choices of resource suppliers are the foundation of the input supply curve. The number
of competing firms supplying the input will rise, as resource prices increase; a reduction in input
prices will have the opposite effect. The market price of resources acts as a balancing wheel,
bringing supply and demand into harmony.
IMPORTANT POINTS AND TEACHING SUGGESTIONS
1. Students often have difficulty understanding the interrelationships among product and resource
2. Be sure to emphasize the role of time as it affects resource markets. Exhibit 3 illustrates that the
3. Two conditions are necessary for long-run equilibrium in a resource market. First, supply and
demand must be in balance. The second requirement for long-run equilibrium is sometimes
overlooked. Resource owners must be earning the market rate of return (considering both
4. Although economic thinking and the interrelationships among product and resource markets are
emphasized in the text, certain abstract concepts cannot be avoided. Use Exhibit 4 to illustrate
5. It is important to note that profit maximization requires the firm to produce a given output at the
6. The impact of resource prices on the demand for substitute and complementary resources should
be noted. How did the sharp increase in crude oil price during the 1970s affect the demand for
substitute resources such as coal, insulation, and solar energy? What did it do to the demands
for different size cars? How was the future supply of these resources influenced with the passage
of time? Discussion of these and related questions will help students grasp the interrelationships
HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS
1.
or service that the resource helps produce rather than utility derived directly from the resource.
5. Profit-maximizing firms will hire a resource only if they expect its MRP to be greater than (or
equal to) its price (resource-hiring cost). However, they are not unique in this regard. Neither
10. Other things being constant, a lengthy training requirement to perform in an occupation
reduces supply and places upward pressure on the earnings level. However, resource prices,