3 Determinants of Resource Demand

1. Changes in the demand for the product
   • price increase of the product increases the demand for the rsource
   • derived demand
   • coffe beans for americano
2. Changes in productivity of the resource
   • new technique is developed that cuts production time in half
   • each worker generating a greater marginal revenue product
   • increases the demand for labor
3. Changes in price of other resources
   • substitue resources
     • if the price of NVIDIA graphic card increases, desktop manufacturer will more willing to demand AMD graphic card
   • complementary resources
     • Both aluminum and sugar are used in the production of soft drinks. If the price of aluminum increases, then we would see the demand for sugar decrease since both products are used to produce soft drinks.

3 Determinants of Resource Supply

1. Personal values / leisure
   • Low-skill workers decide that working at minimum wage isn’t worth their time. This would shift the labor supply curve to the left due to the decrease in the amount of workers.
   • The increase in the labor force, especially women, during WWII because people saw it as a patriotic duty to help produce the goods that would help in the war efforts. This would increase the labor supply and shift the curve right.
2. Government regulation/licensing
   • If the government establishes a certification process that makes it harder to be an electrician than we would see the supply of electricians decrease shifting the labor supply curve to the left
   • If puffer fish food cooks had to get an advanced degree, supply would fall
3. Number of qualified workers
   • Education, Immigration, Training
     • If a country enacts stricter immigration laws than that will shift the labor supply to the left because of the smaller pool of workers.

Graphs

• Notice that \(S_L\) and \(D_L\) are used to describe the supply and demand of labor.

Perfect Competition Product Market vs Resource Market

• The perfect labor market firm graph looks a little different than it did in the product market.
• The demand for labor, otherwise known as MRP, is downward sloping.
• The supply of labor, otherwise known as MRC, is perfectly elastic.
• This shows that workers are wage takers and that firms hire all workers at the same wage level set by the market.
• The quantity of labor that each individual firm will hire is where MRC = MRP.

Cost minimizing combination of resources (Least-Cost Rule)

• Firms must be careful to choose a combination of resources that will minimize their costs
• In order for a firm to be using the combination of resources that will reduce its costs, they have to satisfy the following formula \[\frac{MP_X}{P_X} = \frac{MP_Y}{P_Y}\]

MP stands for marginal product and P stands for price. The x and y represent different resources.

Let’s look at an example with robots, a capital resource, and workers, labor resources. For this example, let’s say the firm has a budget of 35USD and needs to find the combination of resources that will minimize their costs. Robots cost 10USD each and workers cost 5USD each.

Input = c(1:4)
MP_Robot = c(30,20,10,5)
P_Robot = rep(10,4)
MP_Worker = c(20,15,10,5)
P_Worker = rep(5,4)
MP_P_Robot = MP_Robot/P_Robot
MP_P_Worker = MP_Worker/P_Worker

df = as.data.frame(cbind(Input,MP_Robot,P_Robot, MP_P_Robot,
                         MP_Worker, P_Worker,MP_P_Worker))

datatable(df, rownames = FALSE,
          options = list(
            columnDefs = list(list(className = 'dt-center', targets = "_all")))
            )

From the above graph

• The first step in determining the least cost combination is to decide what resources you are going to purchase. We always start with the resource that has the highest MP/P. In this case that is the first worker. When this firm purchases the first worker, we subtract 5USD off their budget, which leaves them with 30USD (35USD-5USD).

• They then move on to determine whether they should buy another worker or the first robot. Since the MP/P is the same for both these resources they will purchase a robot and a worker, which will cost them 15USD. This reduces their budget to 15USD (30USD-15USD).

• They then go on to the 3rd worker and the 2nd robot and see that the MP/P are identical here as well. They will again purchase both the worker and the robot, which will cost them 15USD and will exhaust their budget (15USD-15USD).

Differences between a perfectly competitive labor market and a monopsony

• Perfectly competitive
  • Supply = MRC
  • Hires workers at a quantity where MRP = MRC
  • Wage = MRP
• Monopsony
  • Supply < MRC
  • Hires fewer workers than perfectly competitive market because MRC > Supply
  • Wage < MRP

In a monopsony, we determine the number of workers by finding where MRP = MRC and then going down to the horizontal axis. We determine wage by finding MRP = MRC and then going down to the supply curve and over to the vertical axis.

Sample Problem

There is 1 large hospital in a city that hires nurses. There are no other hospitals nearby that nurses are willing or able to travel to. What is the labor cost for this firm based on the graph?

• Answer
  • 360 USD
• Explanation
  • Since the large hospital is the only firm hiring nurses, we know that this is a monopsony. Monopsonistic firms hire the quantity where MRP = MRC, but only pay the wage level where the quantity intersects the labor supply curve. Therefore, we know that the equilibrium wage is 12USD and the equilibrium quantity is 30. To find our total labor costs for nurses, we simply multiply the wage by the quantity (12USD x 30 = 360USD).