Market structure of production resources

1. Unit 6. Market structure of production resources Resource Markets

Unit
1 6. Market structure of production
resources
Resource Markets

2. Topics:

2
• 1. General characteristics of the market of production
resources.
• 2. Labor market and wages.
• 3. Market of material factors of production (capital, land).
• ________________________________
• 4. Resource demand
• 5. Resource supply
• 6. Demand and supply of resources
• 7. Market Equilibrium For a Resource and the Firm’s
Employment Decision

3. References:

3
References:
• A practical guide to seminars on economic theory. – M.: Vlados, 2016 .–
272 p.
• Alberto Bisin (2011) Introduction to economic analysis, Dept. of
Economics NYU
• Asher Isaacs, C. W. McKee, R. E. Slesinger, Selected Readings in Modern
Economics (New York: The Dry den Press, 1952 [Isaacs and Others]
• Basovsky L.E. Microeconomics: a textbook for university students / L. E.
Basovsky, E.N. Basovskaya. – M.: INFRA-M, 2015.– 224 p.
• Burganov, R.A. Economic Theory: Textbook / R.A. Burganov.– M.: SIC
INFRA-M, 2016.– 416 p.

4. Resource Demand

4
• As long as the additional revenue from
employing another worker exceeds the additional
cost, the firm should hire the worker
• The same would be true for adding one more unit
of capital or land
• A producer demands an additional unit of a
resource as long as its marginal revenue exceeds
its marginal cost

5. Resource Supply

5
• Resource owners will supply their resources to
the highest-paying alternative, other things equal
• Since other things are not always equal, resource
owners must be paid more to supply their
resources to certain uses
• In the case of labor, the worker’s utility depends
on both the monetary and nonmonetary aspects
of the job

6. Demand and Supply of Resources

6
• Firms demand resources so as to maximize profit
and households supply resources so as to
maximize utility
• Any differences between the profit-maximizing
goals of firms and the utility-maximizing goals of
households are reconciled through voluntary
exchange in markets
• Exhibit 1 presents the market for a particular
resource

7. Exhibit 1: Resource Market for Carpenters

7
Like the demand and
supply for resources
depend on the willingness
and ability of buyers and
sellers to participate in
market exchange the
market will converge to
the equilibrium wage rate,
or the market price, for
this type of labor.
S
Dollars per hour of labor
The demand curve slopes
downward and the supply
curve slopes upward.
W
D
0
E
Hours of labor per
period

8. Market Demand for Resources

8
Why do firms employ resources?
• Resources are used to produce goods and
services, which firms try to sell at a profit
• A firm does not value the resource itself but
the resource’s ability to produce goods and
services demand depends on the value of
what it produces it is a derived demand
derived from the demand for the final product

9. Market Demand for Resources

9
• The market demand for a particular resource
is the sum of demands for that resource in all
its different uses
• The demand curve for a resource, like the
demand curves for the goods produced by
the resource, slopes downward as the
price of a resource falls, producers are more
willing and able to employ that resource

10. Market Demand for Resources

10
• Consider first the producer’s greater willingness to
hire resources as the resource prices fall
• In developing the demand curve for a particular
resource, we assume the prices of other resources
remain constant
• Thus, if the price of a particular resource falls, it
becomes relatively cheaper compared to other
resources the firm could use to produce the same
output they are more willing to hire this resource
• Thus, we observe substitution in production

11. Market Demand for Resources

11
• A lower price for a resource also increases a
producer’s ability to hire that resource
• For example, if the wage for carpenters fall,
homebuilders can hire more carpenters for the
same cost

12. Market Supply for Resources

12
• The market supply curve of a resource sums
all the individual supply curves for that
resource
• Resource suppliers tend to be both more willing
and more able to supply the resource as its price
increases => the market supply curve slopes
upward as shown in Exhibit 1

13. Market Supply for Resources

13
• Resource suppliers are more willing because a
higher resource price, other things constant,
means more goods and services can be
purchased with the earnings from each unit of
the resource supplied
• Resource prices are signals about the rewards
for supply resources to alternative activities
higher prices will draw resources from lowervalued uses

14. Market Supply for Resources

14
• Resource supply curves also slope upward
because resource owners are able to supply
more of the resource at a higher price
• Higher wages enable resource suppliers to
increase their quantity supplied

15. Temporary and Permanent Resource Price Differences

15
• Resource owners have a strong interest in selling
their resources where they are most valued
resources tend to flow to their highest-valued use
• Because resource owners seek the highest pay,
other things constant, the prices paid for
identical resources tend toward equality
• Consider the situation in Exhibit 2

16. Exhibit 2: Market for Carpenters in Alternative Uses

16
Suppose carpenters are paid $25 an hour to
build a home, which is $5 more than that
earned by carpenters making furniture:
shown by the initial wage of $25 in panel (a)
and a wage of $20 in panel (b). This
difference will encourage some carpenters
to move from furniture making to home
building ==> the wage in home building
decreases and the wage in furniture
building increases.
This shift will continue until the shifts in
supply yield a wage of $25 in both markets
2,000 hours of labor per day move from
furniture to home building. As long as the
nonmonetary benefit of supplying resources to
alternative uses are identical and as long as
resources are freely mobile, resources will
adjust across uses until they are paid the same
rate
(b) Furniture making
S’f f Sf
Sh
S' h
$25
24
Dh
Dollarsperhour
Dollars per hour
(a) Home building
$24
20
Df
0
58 60
0
10 12
Hours of labor per day (thousands)

17. Temporary Differences in Resource Prices

17
• Resource prices sometimes differ
temporarily across markets because
adjustment takes time
• However, despite the time that this may take,
when resource markets are free to adjust,
price differences trigger the reallocation of
resources, which equalizes payments for
similar resources

18. Permanent Differences in Resource Prices

18
• Not all resource price differences cause a
reallocation of resources
• For example, land, which is relatively immobile,
may lead to permanent differences in land prices
• Similarly, certain wage differentials stem from
the different costs of acquiring the education and
training required to perform particular tasks
• Other earning differentials reflect differences in
the nonmonetary aspects of similar jobs

19. Summary

19
• Temporary price differences spark the
movement of resources away from lowerpaid uses toward higher-paid uses
• Permanent price differences cause no such
reallocations
• Lack of resource mobility
• Differences in the inherent quality of the
resource
• Differences in the time and money involved in
developing the necessary skills
• Differences in nonmonetary aspects of job

20. Opportunity Cost and Economic Rent

20
• Recall that opportunity cost is what that
resources could earn in its best alternative use
• Economic rent is that portion of a resource’s
total earnings that is not necessary to keep
the resource in its present use form of
producer surplus earned by resource
suppliers

21. Opportunity Cost and Economic Rent

21
• The division between these two categories
depends on the resource owner’s elasticity of
supply
• In general, the less elastic the resource supply,
the greater the economic rent as a proportion of
total earnings
• Conversely, the more elastic the resource supply,
the lower the economic rent as a proportion of
total earnings

22. All Earnings are Economic Rent

22
• If the supply of a resource to a particular
market is perfectly inelastic, that resource
has no alternative use there is no
opportunity cost and all earnings are
economic rent
• This situation is presented in panel (a) of
Exhibit 3

23. Exhibit 3: Opportunity Cost and Economic Rent

23
(a) All Resource Returns are Economic Rent
The supply of grazing land is shown
by the perfectly inelastic vertical
supply curve, indicating the 10
million acres have no alternative
use.
Here, the fixed supply determines
the equilibrium quantity of the
resource, but demand determines
the equilibrium price.
Dollars per unit
Since the supply is fixed, the
amount paid to rent the land for
grazing has no effect on the
quantity supplied the land’s
opportunity cost is zero all
earnings are economic rent as
shown by the blue shaded area.
S
$1
Economic
rent
D
0
10
Millions of acres
per month

24. Exhibit 3: Opportunity Cost and Economic Rent

24
Dollars per unit
(b) All Resource Returns are Opportunity
Costs
At the other extreme is the case in
which a resource can earn as much
in its best alternative use as in its
present use the supply curve is
perfectly elastic horizontal all
resource returns are opportunity
costs as shown by the pink shaded
area.
S
$10
Opportunity
costs
D
0
1,000
Hours of
labor per week
In this case, the horizontal supply
curve determines the equilibrium
wage, but demand determines the
equilibrium quantity

25. Exhibit 3: Opportunity Cost and Economic Rent

25
(c) Resource returns are divided between
economic rent and opportunity cost
S
Dollars per unit
If the supply curve slopes upward,
the resource supplier earns some
economic rent and some
opportunity cost.
For example, if the market wage
for unskilled work increases
from $5 to $10 per hour, the
quantity of labor supplied
would increase, as would the
economic rent earned by the
resource
Here at asupplier.
market clearing wage
of $10, the pink shaded area
identifies the opportunity cost
and the blue shaded area the
economic rent.
In the case of an upward-sloping
supply curve and a downwardsloping curve, both demand and
supply determine equilibrium price
and quantity.
$10
Economic
rent
5
Opportunity
costs
0
5,000
D
10,000 Hours of labor
per week

26. Summary

26
• Note that specialized resources tend to earn a
higher proportion of economic rent than do
resources with many alternative uses
• Given a resource demand curve that slopes
downward
• When supply is perfectly inelastic, all earnings
are economic rent
• When supply is perfectly elastic, all earnings are
opportunity cost
• When the supply curve slopes upward, earnings
divide economic rent and opportunity cost

27. Closer Look at Resource Demand

27
• In our discussion of a firm’s costs, we varied
the amount of labor employed and examined
the relationship between the quantity of
labor and the amount of output
• We use the same approach here in Exhibit 4,
where all but one of the firm’s inputs remain
constant

28. Exhibit 4: Marginal Revenue Product

28
Possible employment levels of the variable resource listed in column (1).
Total output or total product is in the second column.
Marginal product, reflecting the law of diminishing returns, is in column
three.
Marginal product is the change in total product from employing one more
Marginal
worker.
Workers
Total
Marginal Product
per day Product
Product
Price
(1) (2)
(3) (4)
(5)
(6)
0
1
2
3
4
5
6
7
8
9
10
11
12
0
10
19
27
34
40
45
49
52
54
55
55
53
- $20
$0
10 20 200
9 20 380
8 20 540
7 20 680
6 20 800
5 20 900
4 20 980
3 20 1040
2 20 1080
1 20 1100
0 20 1100
-2 20 1060
$200
180
160
140
120
100
80
60
40
20
0
-40
Total
Revenue
Revenue
Product

29. Marginal Revenue Product

29
• The important question is what happens to
the firm’s revenue when additional workers
are hired?
• 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
marginal benefit from hiring one more unit
of the resource

30. Marginal Revenue Product

30
• A resource’s marginal revenue product
depends on
• How much additional output the resource
produces
• The price at which output is sold

31. Selling Output as a Price Taker

31
• The calculation of marginal revenue product
is simplest when the firm sells output in a
perfectly competitive market
• This is the assumption underlying Exhibit 4
• Since an individual firm in perfect
competition can sell as much as it wants at
the market price

32. Exhibit 4: Marginal Revenue Product

•32
Marginal revenue product is shown in the sixth column and is simply the
marginal product of the resource multiplied by the product price of $20.
• Note that because of diminishing returns, the marginal revenue product
falls steadily as the firm employs additional units of the resource.
Marginal
Workers
Total
Marginal Product
per day Product
Product
Price
(1) (2)
(3) (4)
(5)
(6)
0
1
2
3
4
5
6
7
8
9
10
11
12
0
10
19
27
34
40
45
49
52
54
55
55
53
- $20
$0
10 20 200
9 20 380
8 20 540
7 20 680
6 20 800
5 20 900
4 20 980
3 20 1040
2 20 1080
1 20 1100
0 20 1100
-2 20 1060
$200
180
160
140
120
100
80
60
40
20
0
-40
Total
Revenue
Revenue
Product

33. Selling Output as a Price Maker

33
• If the firm has some market power over the
price that it charges, the demand curve
slopes downward to sell more the firm
must lower price they must search for the
price that maximizes its profit
• Exhibit 5 provides the information needed
for analyzing the resource hiring decision for
the price maker

34. Exhibit 5: Marginal Revenue Product for a Price Maker

34
Exhibit 5: Marginal Revenue Product for
a Price Maker
• The marginal revenue product of labor, which is the change in total revenue resulting from a one-unit
change in the quantity of labor employed, is given in column (5)
• The profit-maximizing firm should be willing and able to pay as much as the marginal revenue product for
an additional unit of the resource it can be thought of as the firm’s demand curve for that resource
• The marginal revenue product for the price maker declines because of the law of diminishing returns and
because additional output can be sold only if the price is lower
Marginal
Workers
Total
Product
Total
per day Product
Price
Revenue
(1) (2)
(3)
(4) = (2) (3)
(5)
1
2
3
4
5
6
7
8
9
10
11
10
19
27
34
40
45
49
52
54
55
55
$40.00
35.20
31.40
27.80
25.00
22.50
20.50
19.00
18.00
17.50
17.50
400.00
668.80
847.80
945.20
1000.00
1012.50
1004.50
988.00
972.00
962.50
962.50
$400.00
268.80
179.00
97.40
54.80
12.50
-8.00
-16.50
-16.00
-9.50
0.00
Revenue
Product

35. Marginal Resource Cost

35
• Marginal resource cost is the additional cost to
the firm of employing one more unit of labor?
• Since the typical firm hires such a tiny fraction
of the available resources, its employment
decision has no effect on the market price of that
resource each firm usually faces a given
market price for the resource and decides only
on how much to hire at that price
• Exhibit 6 shows the market for factory workers

36. Exhibit 6: Market Equilibrium For a Resource and the Firm’s Employment Decision

36
Exhibit 6: Market Equilibrium For a Resource
and the Firm’s Employment Decision
In panel (a) we have the market demand
for factory workers. The intersection of
market demand and supply determines
the market wage of $100 per day
becomes the marginal resource cost of
labor to the firm regardless of how many
workers the firm employees.
In panel (b) the marginal resource
cost curve is shown by the horizontal
at the $100 market wage. The
marginal revenue product, or
resource demand curve is based on
the firm being a price taker. In this
case the firm will hire 6 workers per
day.
$200
b) Firm
Resource
demand
Resource
supply
100
0
E
Workers
per day
Doll ar s per worker per da y
Dollar s per wor k er p er d ay
a) Market
$200
Marginal revenue product =
resource demand
Marginal resource cost =
resource supply
100
0
6
10
Workers
per day

37. Resource Employment

37
• For all resources employed, the firm should
hire additional units up to the level at which
• Marginal revenue product = marginal resource
cost
• MRP = MRC
• Profit maximization occurs where labor’s
marginal revenue product equals the market
wage

38. Summary

38
• Maximum profit (or minimum loss) occurs
where the marginal revenue from output
equals its marginal cost
• Likewise, maximum profit (or minimum
loss) occurs at the resource level where the
marginal revenue from an input equals its
marginal resource cost
• First rule focuses on output while the second
on input, the two approaches are equivalent
ways of deriving the same principle of profit
maximization

39. Shifts in the Demand for Resources

39
• A resource’s marginal revenue product
consists of two components
• The resource’s marginal product. Two factors can
cause this to change
• A change in the amount of other resources employed
• A change in technology
• The price at which the product is sold. One
factor can cause this to change
• A change in the demand for the product

40. Change in the Price of Other Resources

40
• The marginal product of any resource
depends on the quantity and quality of other
resources used in production
• Resources can be substitutes or complements
• Substitutes
• In this case, an increase in the price of one
increases the demand for the other
• A decrease in the price of one decreases the
demand for the other

41. Change in the Price of Other Resources

41
• Complements
• A decrease in the price of one resource leads to an
increase in the demand for the other
• An increase in the price of one resource leads to a
decrease in the demand for the other
• More generally, any increase in the quantity and
quality of a complementary resource boosts the
marginal productivity of the resource in question
• Alternatively, any decrease in the quantity and
quality of a complementary resource reduces the
marginal productivity of the resource in question

42. Changes in Technology

42
• Technological improvements can boost the
productivity of some resources but can make
others obsolete
• Examples
• Development of computer-controlled machines
increased the demand for computer-trained
machinists but decreased the demand for
machinists without computer skills
• The development of synthetic fibers – rayon and
orlon – increased the demand for acrylics and
polyesters, but reduced the demand for natural
fibers

43. Change in the Demand for the Final Product

43
• Because the demand is derived from the
demand for the final output, any change in
the demand for output will affect resource
demand
• For example, an increase in the demand for
automobiles will increase their market price
increase the marginal revenue product of
autoworkers and other resources employed
by the automobile industry

44. More than One Resource

44
• As long as the marginal revenue product exceeds
the marginal resource cost, the firm can increase
profit or reduce a loss by employing more of a
resource
• This holds for all resources profitmaximizing employers will hire each resource
up to the point at which the last unit hired adds
as much to revenue as it does to cost

45.

45
• Thank you!