Derived Demand

Derived Demand

Demand for a resource because of the products it helps produce

Marginal Revenue Product (MRP)

Revenue that another unit of capital or labor prodces

Two Ways to find MRP

Marginal Product (MP) * Price

or change in total revenue (TR)

Marginal Factor Cost (MFC) or Marginal Resource Cost (MRC)

cost of another unit or capital or labor

Two ways to find MFC/MRC

In perf. comp. - MFC = Wage or change in total wages In imperfect competition - MFC equals the additional cost of hiring one more unit of labor or capital, which may vary with each additional unit.

Profit maximizing amount of labor

MRP=MFC

Two ways to increase MRP

Increase Marginal Product or Increase Price

Elasticity of Resource Demand

% change in resource quantity divided by % change in resource price

Labor and Captal — Complementary, substitute, both, or neither?

Can be Complementary or substitute

Least cost combination of resources

MP labor / P labor = MP capital / P capital

Profit Maximizing rule for labor and capital

MRP labor / P labor = MRP capital / P capital = 1