Resource Pricing and Demand in Economics

Money-income determination

Resource prices determine household income.

Cost minimization

Firms must produce at the lowest cost combination of resources.

Resource allocation

Resource pricing drives efficient allocation of resources over time.

Policy issues

Many policy debates revolve around the resource market.

Derived demand

Demand for resources is based on the demand for the products they help produce.

Marginal Revenue Product (MRP)

Depends on the productivity of the resource and the market value of the product produced.

Rule for employing resources

MRP = MRC

Marginal Resource Cost (MRC)

Change in total (resource) cost ÷ change in resource quantity.

Demand curve in competitive market

Downsloping due to diminishing marginal product.

Demand curve in imperfect market

Downsloping due to diminishing marginal product + falling product price.

Changes in product demand

Higher product demand = higher resource demand.

Changes in productivity

Affected by quantities of other resources, technological advances, and quantity of variable resources.

Substitution effect

Lower input price → use more of that input → ↓ labor demand.

Output effect

Lower input price → higher output → ↑ labor demand.

Complementary resources

If complement price falls → ↑ labor demand.

Elasticity of Resource Demand

Formula: Erd = % change in resource quantity ÷ % change in resource price.

Erd > 1

Elastic.

Erd < 1

Inelastic.

Erd = 1

Unit elastic.

Determinants of elasticity

Ease of resource substitutability, elasticity of product demand, and ratio of resource cost to total cost.

Least-Cost Rule

Minimized cost when: MPL / PL = MPC / PC.

Profit-Maximizing Rule

Max profit when: MRP(resource) = P(resource).

Marginal Productivity Theory of Income Distribution

Income distributed based on contribution to output - 'To each according to the value of what they create.'

Criticisms of income distribution theory

Inequality and market imperfections.

The Resource Market

12% of AP Exam - High chance of FRQs.

Circular Flow Model

Firms demand factors of production (land, labor, capital).

Market Structures

Perfect Competition - Many firms, identical skills, wage-takers; Monopsony - Single employer, wage-setter.

Determinants of Resource Demand (Shifters)

Product demand, productivity, prices of other resources.

Determinants of Resource Supply (Shifters)

Number of qualified workers, government regulation, societal roles.

Additional Vocabulary: Derived Demand

Demand for a resource depends on demand for the products it helps produce.

Marginal Resource Cost (MRC)

Cost of one more unit of resource.

MRP = MRC

Profit maximization rule.

Least-Cost Rule

Minimize cost by equalizing marginal product per dollar spent on each resource.