TAILIEUCHUNG - Lecture Economics (6/e): Chapter 27 - Stephen L. Slavin

Chapter 27 - Demand in the factor market. The following will be discussed in this chapter: Derived demand, productivity, marginal revenue product, changes in resource demand, the substitution and output effects, optimum resource mix for the firm. | Chapter 27 Demand in the Factor Market 27-1 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Derived demand Productivity Marginal revenue product Changes in resource demand The substitution and output effects Optimum resource mix for the firm 27-2 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Derived Demand Derived demand is the demand for resources There are four resources: land, labor, capital, and entrepreneurial ability The demand for these resources is derived from the demand for the final products The demand for land on which to grow corn is derived from the demand for corn The demand for labor with which to produce cars is derived from the demand for cars 27-3 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Productivity Productivity is output per unit of input Productivity is measured by what is produced Inputs measure the four economic resources The more productive a resource is, the more it will be in demand This is reflected in in both their prices and their rents Sally can get higher wages than John because she is more productive An acre of land that produces more cotton than another acre of land will command a higher rent 27-4 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Prices of Substitute Goods A given good or service can usually be produced in many different ways Every country or organization uses the cheapest production method When wages rise, many companies seek to substitute machinery for relatively expensive labor If land becomes more expensive, farmers would work each acre more intensively, substituting labor and capital for more expensive land The demand for a resource is its marginal revenue product schedule (MRP) 27-5 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Marginal Revenue Product (MRP) How much of a resource is purchased depend on three things The price of that resource The productivity of .

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