MicroEconomics Notes Chapter 14 Resources Markets Resource Market market that provides one of the resources for producing goods and services labor capital land Rent and quantity of land used are determined in the land market The wage rate and the number of people employed are determined in the labor market The interest rate and the quantity of capital used are determined in the capital market Firms and Households In resource markets the roles of firms and households are reversed from what they are in the product markets Households are the sellers of resources and firms are the buyers of resources Derived Demand Resources are not wanted for themselves but rather for what they can produce The demand for resources is a derived demand it is driven by the firms needs in order to supply goods and services to the goods and services markets The Firm s Demand Firms maximize profit when they operate at the level where marginal revenue MR equals marginal cost MC For resource markets MR is called the marginal revenue product MRP and MC is called the marginal factor cost MFC Marginal revenue product MRP the additional revenue that an additional resource can create for a firm Marginal factor cost MFC the additional cost of an additional unit of a resource Market Demand The demand curve for a resource slopes downward because as the price of a resource falls everything else constant producers are more willing and able to use that resource instead of others This is the law of diminishing marginal product Marginal Factor Cost Marginal factor cost MFC is the cost of an additional unit of resource Resources will be employed up to the point at which MRP MFC Until this point additional units of resource produce more revenue than they cost they add to profits Hiring Resources in a Perfectly Competitive Market If the firm is purchasing resources in a market where there is a very large number of suppliers of an identical resource a perfectly competitive resource market the price of each additional unit of the resource to the firm is constant Monopsony Monopsonist is a firm that is the only buyer of a resource monopsony firms are able to pay resources less than their MRPs In the early days of the U S many towns sprung up around a single firm which was essentially the only employer in the town This allowed the firm enormous market power in terms of wage setting and hiring practices McDonald s is the largest single purchaser of American beef buying nearly one billion pounds per year McDonald s operates 30 000 restaurants in 120 countries and employees over 12 million workers At equilibrium the last dollar spent on resource must yield the same marginal revenue product no matter what resource the dollar is spent on If a resource is very expensive relative to other resources it must generate a significantly larger MRP than the other resource Product Market Structure and Resource Demand Firms purchase the types and quantities of resource services that allow them to Each firm equates the MRP per dollar of expenditure on all resource services maximize profit used The MRP depends on the market structure in which the firm sells its output A perfectly competitive firm will hire and acquire more resources than firms selling in monopoly oligopoly or monopolistically competitive product markets Resource Supplies Households supply resources in order to maximize utility The quantity of resources that are supplied depends on the wages rents interest and profits offered for those resources Economic Rent Economic Rent when a resource has a perfectly inelastic supply its pay or earnings is called economic rent Transfer Earnings if a resource has a perfectly elastic supply curve its pay or earnings what a resource could earn in its best alternative use the amount that must be paid to get the resource to transfer to another use Economic Rent earnings in excess of transfer earnings Rent Two different meanings for the term rent in economics 1 The payment for the use of something as distinguished from payment for ownership 2 The payment for the use of something that is in fixed that is perfectly inelastic supply
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