Demand for Resources in Economics

CHAPTER 14: THE DEMAND FOR RESOURCES

SIGNIFICANCE OF RESOURCE PRICING

• Resource pricing is crucial for multiple reasons:
  • Income Determination: Resource prices directly influence household earnings.
  • Cost Minimization: Firms aim to use the most efficient, least costly combination of resources.
  • Resource Allocation: Technological advancements can shift resources from one use to another.
  • Policy Issues: Concepts like minimum wage laws and unequal compensation in executive pay raise significant discussions.

HOW COMPETITIVE ARE LABOR MARKETS?

• CEO-to-Worker Compensation Ratio:
  • A historical overview from 1965 to 2021 shows the escalating disparity. In 2021, the aggregated ratio was around 398.8.
  • Notable trends can be observed with increasing ratios indicating income inequality among workers and executives.

MARGINAL PRODUCTIVITY THEORY OF RESOURCE DEMAND

• Assumptions:
  • Firms operate in a perfectly competitive product market and act as price takers.
  • They also participate in a perfectly competitive resource market, hiring resources without affecting prices.

RESOURCE DEMAND AS A DERIVED DEMAND

• Resource demand refers to the curve or schedule showing the amounts of a resource that firms are willing to purchase at various prices.
• This concept is categorized as derived demand; its necessity is contingent upon the demand for the product being produced.
• Example: The demand for accountants stems from the direct need for tax preparation.

MARGINAL REVENUE PRODUCT

• Resource demand is primarily driven by:
  • Productivity: Higher productivity leads to increased demand.
  • Product Value: If the market value of a product is high, more of the resource is needed to satisfy that demand, emphasizing that if a product is unwanted, demand for the resource diminishes.

PRODUCTIVITY

• Both productivity and product price are key in determining resource demand.
• The Law of Diminishing Returns applies as additional units of labor are added to a fixed plant.

PRODUCT PRICE

• Prices are established in perfectly competitive markets, expressed as:
  TR = P imes Q = rac{ riangle TR}{ riangle Labor}
• The Marginal Revenue Product (MRP) represents the change in total revenue from utilizing an additional unit of a resource (here, labor).

RULE FOR EMPLOYING RESOURCES: MRP = MRC

• The optimal hiring strategy for firms:
  • MRP = MRC (Marginal Resource Cost): Firms should hire labor until the additional revenue generated from hiring labor equals the cost of that labor.
  • In a perfectly competitive market, MRC equals the wage rate.

MRP AS RESOURCE DEMAND SCHEDULE

• Example Scenarios:
  • If the market wage is $13.95, the firm will hire 1 worker since MRP ($14) > MRC ($13.95).
  • As wages decrease, firms hire more workers due to lower costs, indicating an inverse relationship between the wage rate and quantity of labor demanded.

MARKET DEMAND FOR A RESOURCE

• The market demand curve illustrates total resource amounts that firms will hire at various prices, achieved by summing individual MRP curves from all firms.

PICKING THE MOST PRODUCTIVE RESOURCE PER DOLLAR

• Substitutes among Resources:
  • If the price of labor is lower than that of capital (
    PL < PC
    ), firms will hire more labor, and vice versa if capital is cheaper.

DETERMINANTS OF RESOURCE DEMAND

• Factors influencing demand shifts:
  1. Changes in Product Demand
  • Increased demand for a product raises its price, subsequently raising the MRP and demand for the resource producing it.
  1. Changes in Resource Productivity
  • Enhanced productivity boosts demand for resources.
  1. Changes in Prices of Other Resources
  • Modifications in prices may inversely or directly affect demand depending on resource relationships (substitutability vs. complementarity).

THE FASTEST-GROWING OCCUPATIONS

• Examining labor demand between 2010-2020 shows:
  • Growth primarily in healthcare positions due to an aging population and better access to services.
  • A decline in manufacturing and construction jobs due to technological advancements.

THE MOST RAPIDLY DECLINING OCCUPATIONS

• Occupations associated with textiles, postal services, and manual labor are significantly declining due to automation and shipping cost reductions.
• Projected job growth shows stark contrasts: Home health aides lead in job creation, while traditional sectors face losses.