In-Depth Notes on Resource Pricing and Demand

Learning Objectives

• Significance of Resource Pricing

• Resource prices are crucial for household income determination.

• Firms must manage costs to maximize profit, impacting resource allocation.

Demand for Resources

• Firms require resources (land, labor, capital) to produce goods/services.

• Resources include labor, land, and entrepreneurship.

• Demand for labor arises from the need for productive workers.

Economic Rent**

• Economic rent is the price for using land/natural resources, fixed in total supply.

• Rent Determination: Based only on demand, as the supply of land is inelastic.

• Example: Land value varies by location; land in Vegas has high rents vs. desert land.

Demand and Elasticity of Resource Demand

• Demand shifts arise from changes in product demand, productivity, or other resource prices.

• Derived demand: Demand for a resource is based on the goods they help produce.

• Elasticity of Resource Demand: Influenced by the substitutability of resources, the elasticity of product demand, and the resource's cost compared to total production costs.

• MRP = MRC Rule: To maximize profits, firms will hire resources until MRP equals MRC.

Marginal Revenue Product (MRP)**

• MRP is the additional revenue from hiring one more unit of input (resource).

• The firm's demand curve for labor is derived from the MRP curve.

Factors Influencing Resource Demand**

• Increase in Product Demand: Raises MRP.

• Changes in Productivity: More productive resources increase MRP.

• Prices of Other Resources: Affect demand through substitutes or complements.

Competitive Firm's Resource Allocation**

• A competitive firm hires resources up to where MRP = MRC, ensuring minimized costs to maximize profits.

Marginal Productivity Theory of Income Distribution**

• Income distribution is based on the productivity value of resources.

• Economic efficiency may be marred by income inequality and market imperfections.

Interest Rates**

• Interest is the price paid for using borrowed money.

• Interest Rate Variations: Affected by risk, maturity of the loan, size, and taxability.

• Loanable Funds Theory: Determines interest rates through the supply and demand for funds in lending markets.

• Changes in the money supply affect interest rates, impacting total investments and R&D spending.

Time Value of Money**

• Money has a time value due to the earning potential of interest.

• Future Value indicates what an amount today will grow over time with compound interest.

• Present Value reflects the current worth of a future amount of money.

Economic Profit**

• Profit is defined as revenue exceeding both explicit and implicit costs.

• Economic profits signal entrepreneurs to allocate resources efficiently towards innovative products or to maintain profitable monopolies.

• Entrepreneurs accept uninsurable risks, influencing resource allocation in the economy.

Functional Distribution of Income**

• Labor accounts for 70% of incomes in the U.S., leaving 20% for rents and profits.

• Economic inequality arises from differences in resource ownership, skill levels, and barriers to entry in job markets.

Summary**

• Economic rents are surplus payments related to fixed land supply while interest determines the allocation of capital and R&D efforts. Economic profits guide resource allocation towards productive and innovative uses, benefiting society overall.