Chapter 12: The Demand for Resources

Derived demand

Resource demand derived from demand of products that resources used to produce

least cost combination of inputs

If a firm is maximizing profit, then it must be using the ________ to do so.

Marginal product (MP)

Additional output resulting from using an additional unit of labor

Marginal revenue product (MRP)

The change in total revenue resulting from the use of each additional unit of a resource

Marginal resource cost (MRC)

The amount that each additional unit of a resource adds to the firm’s total (resource) cost

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

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

Marginal product

________ diminishes and product price falls as output increases → MRP decreases.

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

Elasticity of resource demand

The sensitivity of resource quantity to changes in resource prices

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

Profit-maximizing rule

When each resource is employed to the point at which its marginal revenue product equals its resource price

Marginal productivity theory of income distribution

Income is distributed according to contribution to society’s output