Resource demand derived from demand of products that resources used to produce
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least cost combination of inputs
If a firm is maximizing profit, then it must be using the ________ to do so.
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Marginal product (MP)
Additional output resulting from using an additional unit of labor
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Marginal revenue product (MRP)
The change in total revenue resulting from the use of each additional unit of a resource
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Marginal resource cost (MRC)
The amount that each additional unit of a resource adds to the firm’s total (resource) cost
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MRP = MRC
It will be profitable for a firm to hire additional units of a resource up to the point at which that resource’s MRP is equal to its MRC
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Substitution effect
A firm will purchase more of an input whose relative price has declined and, conversely, use less of an input whose relative price has increased
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Marginal product
________ diminishes and product price falls as output increases → MRP decreases.
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Output effect
The firm will purchase more of one particular input when the price of the other input falls and less of that particular input when the price of the other input rises
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Elasticity of resource demand
The sensitivity of resource quantity to changes in resource prices
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Least cost combination of resources
The cost of any output is minimized when the ratios of marginal product to price of the last units of resources used are the same for each resource
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Profit-maximizing rule
When each resource is employed to the point at which its marginal revenue product equals its resource price
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Marginal productivity theory of income distribution
Income is distributed according to contribution to society’s output
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