Chapter Review Summary

Machine generated alternative text: • Resource allocation Just as product prices allocate finished goods and services to consumers, resource prices allocate resources among industries and firms. In a dynamic economy, where technology and product demand often change, the efficient allocation of resources over time calls for the continuing shift of resources from one use to another. Resource pricing is a major factor in producing those shifts. • Policy issues Many policy issues surround the resource market. Examples: To what extent should government redistribute income through taxes and transfers? Should government do anything to discourage “excess” pay to corporate executives? Should it increase the legal minimum wage? Is the provision of subsidies to farmers efficient? Should government encourage or restrict labor unions? The facts and debates relating to these policy questions are grounded on resource pricing. Marginal Productivity Theory of Resource Demand In discussing resource demand, we will first assume that a firm sells its output in a purely competitive product market and hires a certain resource in a purely competitive resource market. This assumption keeps things simple and is consistent with the model of a competitive labor market that we will develop in Chapter 13. In a competitive product market , the firm is a “price taker” and can dispose of as little or as much output as it chooses at the market price. The firm is selling such a negligible fraction of total output that its output decisions exert no influence on product price. Similarly, the firm also is a “price taker” (or “wage taker”) in the competitive resource market . It purchases such a negligible fraction of the total supply of the resource that its buying (or hiring) decisions do not influence the resource price. Resource Demand as a Derived Demand Resource demand is the starting point for any discussion of resource prices. Other things equal, the demand for a resource is an inverse relationship between the price of the resource and the quantity of the resource demanded. This demand is a derived demand : It is derived from the products that the resources help produce. Resources usually do not directly satisfy customer wants but do so indirectly through their use in producing goods and services. Almost nobody wants to consume an acre of land, a John Deere tractor, or the labor services of a farmer, but millions of households do want to consume the food and fiber products that these resources help produce. Similarly, the demand for airplanes generates a demand for assemblers, and the demands for such services as income-tax preparation, haircuts, and child care create derived demands for accountants, barbers, and child care workers. Marginal Revenue Product Because resource demand is derived from product demand, the strength of the demand for any resource will depend on: • The productivity of the resource in helping to create a good or service. • The market value or price of the good or service it helps produce. A resource that is highly productive in turning out a highly valued commodity will be in great demand. On the other hand, a relatively unproductive resource that is capable of Page 2 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: producing only a minimally valued commodity will be in little demand. And no demand whatsoever will exist for a resource that is phenomenally efficient in producing something that no one wants to buy. Productivity Table 12.1 shows the roles of resource productivity and product price in determining resource demand. Here we assume that a firm adds one variable resource, labor, to its fixed plant. Columns 1 and 2 give the number of units of the resource applied to production and the resulting total product (output). Column 3 provides the marginal product (MP), or additional output, resulting from using each additional unit of labor. Columns 1 through 3 remind us that the law of diminishing returns applies here, causing the marginal product of labor to fall beyond some point. For simplicity, we assume that these diminishing marginal returns—these declines in marginal product—begin with the first worker hired. Table 12.1 The Demand for Labor: Pure Competition in the Sale of the Product Product Price But the derived demand for a resource depends also on the price of the product it produces. Column 4 in Table 12.1 adds this price information. Product price is constant, in this case at $2, because the product market is competitive. The firm is a price taker and will sell units of output only at this market price. Multiplying column 2 by column 4 provides the total-revenue data of column 5. These are the amounts of revenue the firm realizes from the various levels of resource usage. From these total-revenue data we can compute marginal revenue product (MRP) —the change in total revenue resulting from the use of each additional unit of a resource (labor, in this case). In equation form, The MRPs are listed in column 6 in Table 12.1. Page 3 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: Rule for Employing Resources: MRP = MRC The MRP schedule, shown as columns 1 and 6, is the firm’s demand schedule for labor . To understand why, you must first know the rule that guides a profit-seeking firm in hiring any resource: To maximize profit, a firm should hire additional units of a specific resource as long as each successive unit adds more to the firm’s total revenue than it adds to the firm’s total cost. Economists use special terms to designate what each additional unit of labor or other variable resource adds to total cost and what it adds to total revenue. We have seen that MRP measures how much each successive unit of a resource adds to total revenue. The amount that each additional unit of a resource adds to the firm’s total (resource) cost is called its marginal resource cost (MRC). In equation form, So we can restate our rule for hiring resources as follows: It will be profitable for a firm to hire additional units of a resource up to the point at which that resource’s MRP is equal to its MRC. For example, as the rule applies to labor, if the number of workers a firm is currently hiring is such that the MRP of the last worker exceeds his or her MRC, the firm can profit by hiring more workers. But if the number being hired is such that the MRC of the last worker exceeds his or her MRP, the firm is hiring workers who are not “paying their way” and it can increase its profit by discharging some workers. You may have recognized that this MRP = MRC rule is similar to the MR = MC profit-maximizing rule employed throughout our discussion of price and output determination. The rationale of the two rules is the same, but the point of reference is now inputs of a resource, not outputs of a product. MRP as Resource Demand Schedule Let’s continue with our focus on labor, knowing that the analysis also applies to other resources. In a purely competitive labor market, market supply and market demand establish the wage rate. Because each firm hires such a small fraction of market supply, it cannot influence the market wage rate; it is a wage taker, not a wage maker. This means that for each additional unit of labor hired, total resource cost increases by exactly the amount of the constant market wage rate. The MRC of labor exactly equals the market wage rate. Thus, resource “price” (the market wage rate) and resource “cost” (marginal resource cost) are equal for a firm that hires a resource in a competitive labor market. Then the MRP = MRC rule tells us that, in pure competition, the firm will hire workers up to the point at which the market wage rate (its MRC) is equal to its MRP. In terms of the data in columns 1 and 6 of Table 12.1, if the market wage rate is, say, $13.95, the firm will hire only one worker. This is so because the first worker adds $14 to total revenue and slightly less—$13.95—to total cost. In other words, because MRP exceeds MRC for the first worker, it is profitable to hire that worker. For each successive worker, however, MRC (= $13.95) exceeds MRP (= $12 or less), indicating that it will not be profitable to hire any of those workers. If the wage rate is $11.95, by the same reasoning we Page 4 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: discover that it will pay the firm to hire both the first and second workers. Similarly, if the wage rate is $9.95, three workers will be hired. If it is $7.95, four. If it is $5.95, five. And so forth. So here is the key generalization: The MRP schedule constitutes the firm’s demand for labor because each point on this schedule (or curve) indicates the number of workers the firm would hire at each possible wage rate. In Figure 12.1, we show the D = MRP curve based on the data in Table 12.1. 1 The competitive firm’s resource demand curve identifies an inverse relationship between the wage rate and the quantity of labor demanded, other things equal. The curve slopes downward because of diminishing marginal returns. 1 Note that we plot the points in Figure 12.1 halfway between succeeding numbers of resource units because MRP is associated with the addition of 1 more unit. Thus in Figure 12.1, for example, we plot the MRP of the second unit ($12) not at 1 or 2 but at . This “smoothing” enables us to sketch a continuously downsloping curve rather than one that moves downward in discrete steps as each new unit of labor is hired. Figure 12.1 The purely competitive seller’s demand for a resource. The MRP curve is the resource demand curve; each of its points relates a particular resource price (= MRP when profit is maximized) with a corresponding quantity of the resource demanded. Under pure competition, product price is constant; therefore, the downward slope of the D = MRP curve is due solely to the decline in the resource’s marginal product (law of diminishing marginal returns). Resource Demand under Imperfect Product Market Competition Our analysis of resource demand (here, labor demand) becomes more complex when the firm is selling its product in an imperfectly competitive market, one in which the firm is a price maker. Pure monopoly, oligopoly, and monopolistic competition in the product market all mean that the firm’s product demand curve is downsloping; when the curve is fixed in place, the firm can increase its sales only by setting a lower price. Page 5 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: The productivity data in Table 12.1 are retained in columns 1 to 3 in Table 12.2. But here in Table 12.2 we show in column 4 that product price must be lowered to sell the marginal product of each successive worker. The MRP of the purely competitive seller of Table 12.1 falls for a single reason: Marginal product diminishes. But the MRP of the imperfectly competitive seller of Table 12.2 falls for two reasons: Marginal product diminishes and product price falls as output increases. Table 12.2 The Demand for Labor: Imperfect Competition in the Sale of the Product We emphasize that the lower price accompanying each increase in output (total product) applies not only to the marginal product of each successive worker but also to all prior output units that otherwise could have been sold at a higher price. Observe that the marginal product of the second worker is 6 units of output. These 6 units can be sold for $2.40 each, or, as a group, for $14.40. But $14.40 is not the MRP of the second worker. To sell these 6 units, the firm must take a 20-cent price cut on the 7 units produced by the first worker—units that otherwise could have been sold for $2.60 each. Thus, the MRP of the second worker is only $13 [= $14.40 – (7 × 20 cents)], as shown. Similarly, the third worker adds 5 units to total product, and these units are worth $2.20 each, or $11 total. But to sell these 5 units, the firm must take a 20-cent price cut on the 13 units produced by the first two workers. So the third worker’s MRP is only $8.40 [= $11 – (13 × 20 cents)]. The other figures in column 6 are derived similarly. In Figure 12.2 we graph the MRP data from Table 12.2 and label it “ D = MRP (imperfect competition).” The broken-line resource demand curve, in contrast, is that of the purely competitive seller represented in Figure 12.1. A comparison of the two curves demonstrates that, other things equal, the resource demand curve of an imperfectly competitive seller is less elastic than that of a purely competitive seller. Consider the effects of an identical percentage decline in the wage rate (resource price) from $11 to $6 in Figure 12.2. Comparison of the two curves reveals that the imperfectly competitive seller (solid curve) does not expand the quantity of labor it employs by as large a percentage as does the purely competitive seller (broken curve). Figure 12.2 The imperfectly competitive seller’s demand curve for a resource. Page 6 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: An imperfectly competitive seller’s resource demand curve D (solid) slopes downward because both marginal product and product price fall as resource employment and output rise. This downward slope is greater than that for a purely competitive seller (dashed resource demand curve) because the pure competitor can sell the added output at a constant price. It is not surprising that the imperfectly competitive producer is less responsive to resource price cuts than the purely competitive producer. The imperfect competitor’s relative reluctance to employ more resources, and produce more output, when resource prices fall reflects its tendency to restrict output in the product market. Other things equal, the imperfectly competitive seller produces less of a product than a purely competitive seller. In producing that smaller output, it demands fewer resources. (Key Question 2) Worked Problems W 12.1 Resource demand Market Demand for a Resource The total, or market, demand curve for a specific resource shows the various total amounts of the resource that firms will purchase or hire at various resource prices, other things equal. Recall that the total, or market, demand curve for a product is found by summing horizontally the demand curves of all individual buyers in the market. The market demand curve for a particular resource is derived in essentially the same way—by summing horizontally the individual demand or MRP curves for all firms hiring that resource. Quick Review 12.1 Page 7 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: • To maximize profit, a firm will purchase or hire a resource in an amount at which the resource’s marginal revenue product equals its marginal resource cost (MRP = MRC). • Application of the MRP = MRC rule to a firm’s MRP curve demonstrates that the MRP curve is the firm’s resource demand curve. In a purely competitive resource market, resource price (the wage rate) equals MRC. • The resource demand curve of a purely competitive seller is downsloping solely because the marginal product of the resource diminishes; the resource demand curve of an imperfectly competitive seller is downsloping because marginal product diminishes and product price falls as output is increased. Consider This...: Superstars In what economist Robert Frank calls “winner-take-all-markets,” a few highly talented performers have huge earnings relative to the average performers in the market. Because consumers and firms seek out “top” performers, small differences in talent or popularity get magnified into huge differences in pay. © PRNewsFoto/Diamond Information Center In these markets, consumer spending gets channeled toward a few performers. The media then “hypes” these individuals, which further increases the public’s awareness of their talents. Many more consumers then buy the stars’ products. Although it is not easy to stay on top, several superstars emerge. The high earnings of superstars results from the high revenues they generate from their work. Consider Beyoncé Knowles. If she sold only a few thousand songs and attracted only a few hundred fans to each concert, the revenue she would produce—her marginal revenue product—would be quite modest. So, too, would be her earnings. But consumers have anointed Beyoncé as queen of the R&B and hip-hop portion of pop culture. The demand for her music and concerts is extraordinarily high. She sells millions of songs, not thousands, and draws thousands to her concerts, not hundreds. Her extraordinarily high net earnings derive from her extraordinarily high MRP. Page 8 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: So it is for the other superstars in the “winner-take-all markets.” Influenced by the media, but coerced by no one, consumers direct their spending toward a select few. The resulting strong demand for these stars’ services reflects their high MRP. And because top talent (by definition) is very limited, superstars receive amazingly high earnings. Determinants of Resource Demand What will alter the demand for a resource—that is, shift the resource demand curve? The fact that resource demand is derived from product demand and depends on resource productivity suggests two “resource demand shifters.” Also, our analysis of how changes in the prices of other products can shift a product’s demand curve (Chapter 3) suggests another factor: changes in the prices of other resources . Changes in Product Demand Other things equal, an increase in the demand for a product will increase the demand for a resource used in its production, whereas a decrease in product demand will decrease the demand for that resource. Let’s see how this works. The first thing to recall is that a change in the demand for a product will change its price. In Table 12.1, let’s assume that an increase in product demand boosts product price from $2 to $3. You should calculate the new resource demand schedule (columns 1 and 6) that would result and plot it in Figure 12.1 to verify that the new resource demand curve lies to the right of the old demand curve. Similarly, a decline in the product demand (and price) will shift the resource demand curve to the left. This effect—resource demand changing along with product demand—demonstrates that resource demand is derived from product demand. Example: Assuming no offsetting change in supply, a decrease in the demand for new houses will drive down house prices. Those lower prices will decrease the MRP of construction workers, and therefore the demand for construction workers will fall. The resource demand curve such as in Figure 12.1 or Figure 12.2 will shift to the left. Changes in Productivity Other things equal, an increase in the productivity of a resource will increase the demand for the resource and a decrease in productivity will reduce the demand for the resource. If we doubled the MP data of column 3 in Table 12.1, the MRP data of column 6 would also double, indicating a rightward shift of the resource demand curve. The productivity of any resource may be altered over the long run in several ways: • Quantities of other resources The marginal productivity of any resource will vary with the quantities of the other resources used with it. The greater the amount of capital and land resources used with, say, labor, the greater will be labor’s marginal productivity and, thus, labor demand. Page 9 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: • Technological advance Technological improvements that increase the quality of other resources, such as capital, have the same effect. The better the quality of capital, the greater the productivity of labor used with it. Dockworkers employed with a specific amount of real capital in the form of unloading cranes are more productive than dockworkers with the same amount of real capital embodied in older conveyor-belt systems. • Quality of the variable resource Improvements in the quality of the variable resource, such as labor, will increase its marginal productivity and therefore its demand. In effect, there will be a new demand curve for a different, more skilled, kind of labor. All these considerations help explain why the average level of (real) wages is higher in industrially advanced nations (for example, the United States, Germany, Japan, and France) than in developing nations (for example, Nicaragua, Ethiopia, Angola, and Cambodia). Workers in industrially advanced nations are generally healthier, better educated, and better trained than are workers in developing countries. Also, in most industries they work with a larger and more efficient stock of capital goods and more abundant natural resources. This creates a strong demand for labor. On the supply side of the market, labor is scarcer relative to capital in industrially advanced than in most developing nations. A strong demand and a relatively scarce supply of labor result in high wage rates in the industrially advanced nations. Changes in the Prices of Other Resources Changes in the prices of other resources may change the demand for a specific resource. For example, a change in the price of capital may change the demand for labor. The direction of the change in labor demand will depend on whether labor and capital are substitutes or complements in production. Substitute Resources Suppose the technology in a certain production process is such that labor and capital are substitutable. A firm can produce some specific amount of output using a relatively small amount of labor and a relatively large amount of capital, or vice versa. Now assume that the price of machinery (capital) falls. The effect on the demand for labor will be the net result of two opposed effects: the substitution effect and the output effect. • Substitution effect The decline in the price of machinery prompts the firm to substitute machinery for labor. This allows the firm to produce its output at lower cost. So at the fixed wage rate, smaller quantities of labor are now employed. This substitution effect decreases the demand for labor. More generally, the substitution effect indicates that a firm will purchase more of an input whose relative price has declined and, conversely, use less of an input whose relative price has increased. • Output effect Because the price of machinery has fallen, the costs of producing various outputs must also decline. With lower costs, the firm finds it profitable to produce and sell a greater output. The greater output increases the demand for all resources, including labor. So this output effect increases the demand for labor. More generally, the output effect means that the firm will purchase more of one particular input when the price of the other input falls and less of that particular input when the price of the other input rises. Page 10 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: • Net effect The substitution and output effects are both present when the price of an input changes, but they work in opposite directions. For a decline in the price of capital, the substitution effect decreases the demand for labor and the output effect increases it. The net change in labor demand depends on the relative sizes of the two effects: If the substitution effect outweighs the output effect, a decrease in the price of capital decreases the demand for labor. If the output effect exceeds the substitution effect, a decrease in the price of capital increases the demand for labor. Complementary Resources Recall from Chapter 3 that certain products, such as computers and software, are complementary goods; they “go together” and are jointly demanded. Resources may also be complementary; an increase in the quantity of one of them used in the production process requires an increase in the amount used of the other as well, and vice versa. Suppose a small design firm does computer-assisted design (CAD) with relatively expensive personal computers as its basic piece of capital equipment. Each computer requires exactly one design engineer to operate it; the machine is not automated—it will not run itself—and a second engineer would have nothing to do. Now assume that a technological advance in the production of these computers substantially reduces their price. There can be no substitution effect because labor and capital must be used in fixed proportions , one person for one machine. Capital cannot be substituted for labor. But there is an output effect. Other things equal, the reduction in the price of capital goods means lower production costs. Producing a larger output will therefore be profitable. In doing so, the firm will use both more capital and more labor. When labor and capital are complementary, a decline in the price of capital increases the demand for labor through the output effect. We have cast our analysis of substitute resources and complementary resources mainly in terms of a decline in the price of capital. Table 12.3 summarizes the effects of an increase in the price of capital on the demand for labor. Please study it carefully. Table 12.3 The Effect of an Increase in the Price of Capital on the Demand for Labor, D L (2) Increase in the Price of Capital (1) Relationship of Inputs (a) Substitution Effect (b) Output Effect (c) Combined Effect Substitutes in production Labor substituted for capital Production costs up, output down, and less of both capital and labor used D L increases if the substitution effect exceeds the output effect; D L decreases if the output effect exceeds the substitution effect Complements in production No substitution of labor for capital Production costs up, output down, and less of both capital and labor used D L decreases Page 11 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: Now that we have discussed the full list of the determinants of labor demand, let’s again review their effects. Stated in terms of the labor resource, the demand for labor will increase (the labor demand curve will shift rightward) when: • The demand for (and therefore the price of) the product produced by that labor increases . • The productivity (MP) of labor increases . • The price of a substitute input decreases , provided the output effect exceeds the substitution effect. • The price of a substitute input increases , provided the substitution effect exceeds the output effect. • The price of a complementary input decreases . Be sure that you can “reverse” these effects to explain a decrease in labor demand. Table 12.4 provides several illustrations of the determinants of labor demand, listed by the categories of determinants we have discussed. You will benefit by giving them a close look. Table 12.4 Determinants of Labor Demand: Factors That Shift the Labor Demand Curve Determinant Examples Change in product demand Gambling increases in popularity, increasing the demand for workers at casinos. Consumers decrease their demand for leather coats, decreasing the demand for tanners. The Federal government increases spending on homeland security, increasing the demand for security personnel. Change in productivity An increase in the skill levels of physicians increases the demand for their services. Computer-assisted graphic design increases the productivity of, and demand for, graphic artists. Change in the price of another resource An increase in the price of electricity increases the cost of producing aluminum and reduces the demand for aluminum workers. The price of security equipment used by businesses to protect against illegal entry falls, decreasing the demand for night guards. The price of cell phone equipment decreases, reducing the cost of cell phone service; this in turn increases the demand for cell phone assemblers. Health-insurance premiums rise, and firms substitute part-time workers who are not covered by insurance for full-time workers who are. Page 12 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: Occupational Employment Trends Changes in labor demand have considerable significance since they affect wage rates and employment in specific occupations. Increases in labor demand for certain occupational groups result in increases in their employment; decreases in labor demand result in decreases in their employment. For illustration, let’s first look at occupations for which labor demand is growing and then examine occupations for which it is declining. (Wage rates are the subject of the next chapter.) The Fastest-Growing Occupations Table 12.5 lists the 10 fastest-growing U.S. occupations for 2006 to 2016, as measured by percentage changes and projected by the Bureau of Labor Statistics. It is no coincidence that the service occupations dominate the list. In general, the demand for service workers in the United States is rapidly outpacing the demand for manufacturing, construction, and mining workers. Table 12.5 The 10 Fastest-Growing U.S. Occupations in Percentage Terms, 2006–2016 Employment, Thousands of Jobs Occupation 2006 2016 Percentage Increase * Network systems and data communication analysts 262 402 53.4 Personal and home care aides 767 1156 50.6 Home health aides 787 1171 48.7 Software engineers, applications 507 733 44.6 Veterinary technicians 71 100 41.0 Personal financial advisors 176 248 41.0 Make-up artists 2 3 39.8 Medical assistants 417 565 35.4 Veterinarians 62 64 35.0 Substance abuse and behavioral disorder counselors 83 112 34.3 * Percentages and employment numbers may not reconcile due to rounding. Source: Bureau of Labor Statistics, “Employment Projections,” www.bls.gov . Of the 10 fastest-growing occupations in percentage terms, three—personal and home care aides (people who provide home care for the elderly and disabled), home health care aides (people who provide short-term medical care after discharge from hospitals), and medical assistants—are related to health care. The rising demands for these types of labor are derived from the growing demand for health services, caused by several factors. The aging of the U.S. population has brought with it more medical problems, the rising standard of income has led to greater expenditures on health care, and the continued presence of Page 13 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: private and public insurance has allowed people to buy more health care than most could afford individually. Two of the fastest-growing occupations are directly related to computers. The increase in the demand for network systems and data communication analysts and computer software engineers arises from the rapid rise in the demand for computers, computer services, and Internet use. It also results from the rising marginal revenue productivity of these particular workers, given the vastly improved quality of the computer and communications equipment they work with. Moreover, price declines on such equipment have had stronger output effects than substitution effects, increasing the demand for these kinds of labor. The Most Rapidly Declining Occupations In contrast, Table 12.6 lists the 10 U.S. occupations with the greatest projected job loss (in percentage terms) between 2006 and 2016. Several of the occupations owe their declines mainly to “labor-saving” technological change. For example, automated or computerized equipment has greatly reduced the need for file clerks, model and pattern makers, and telephone operators. The advent of digital photography explains the projected decline in the employment of people operating photographic processing equipment. Table 12.6 The 10 Most Rapidly Declining U.S. Occupations in Percentage Terms, 2006 –2016 Employment, Thousands of Jobs Occupation 2006 2016 Percentage Increase * Photographic processing machine operators 49 25 —49.8 File clerks 234 137 —41.3 Model makers and pattern makers, wood 4 2 —40.3 Telephone operators 27 16 —39.5 Shoe machine operators 4 3 —35.7 Forging machine operators 31 21 —30.4 Electrical coil winders, tapers, and finishers 23 16 —30.5 Fabric and apparel pattern makers 9 7 —28.6 Textile machine operators 122 88 —27.9 Sewing machine operators 233 170 —27.2 * Percentages and employment numbers may not reconcile due to rounding. Source: Bureau of Labor Statistics, “Employment Projections,” www.bls.gov . Three of the occupations in the declining employment list are related to textiles and apparel. The U.S. demand for these goods is increasingly being filled through imports. Those jobs are therefore rapidly disappearing in the United States. Page 14 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: As we indicated, the “top-10” lists shown in Tables 12.5 and 12.6 are based on percentage changes. In terms of absolute job growth and loss, the greatest projected employment growth between 2006 and 2016 is for registered nurses (587,000 jobs) and retail sales persons (557,000 jobs). The greatest projected absolute decline in employment is for stock clerks (–131,000) and cashiers (–116,000 jobs). Elasticity of Resource Demand The employment changes we have just discussed have resulted from shifts in the locations of resource demand curves. Such changes in demand must be distinguished from changes in the quantity of a resource demanded caused by a change in the price of the specific resource under consideration. Such a change is caused not by a shift of the demand curve but, rather, by a movement from one point to another on a fixed resource demand curve. Example: In Figure 12.1 we note that an increase in the wage rate from $5 to $7 will reduce the quantity of labor demanded from 5 to 4 units. This is a change in the quantity of labor demanded as distinct from a change in demand . The sensitivity of resource quantity to changes in resource prices is measured by the elasticity of resource demand . In coefficient form, Origin of the Idea O 12.1 Elasticity of resource demand When E rd is greater than 1, resource demand is elastic; when E rd is less than 1, resource demand is inelastic; and when E rd equals 1, resource demand is unit-elastic. What determines the elasticity of resource demand? Several factors are at work. Ease of Resource Substitutability The degree to which resources are substitutable is a fundamental determinant of elasticity. The greater the substitutability of other resources, the more elastic is the demand for a particular resource. Because automated voice-mail systems are highly substitutable for telephone receptionists, the demand for receptionists is quite elastic. In contrast, good substitutes for physicians are rare, so demand for them is less elastic or even inelastic. If a furniture manufacturer finds that several types of wood are equally satisfactory in making coffee tables, a rise in the price of any one type of wood may cause a sharp drop in the amount demanded as the producer substitutes some other type of wood for the type of wood whose price has gone up. At the other extreme, there may be no reasonable substitutes; bauxite is absolutely essential in the production of aluminum ingots. Thus, the demand for bauxite by aluminum producers is inelastic. Time can play a role in the ease of input substitution. For example, a firm’s truck drivers may obtain a substantial wage increase with little or no immediate decline in employment. Page 15 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: But over time, as the firm’s trucks wear out and are replaced, that wage increase may motivate the company to purchase larger trucks and in that way deliver the same total output with fewer drivers. Elasticity of Product Demand Because the demand for labor is a derived demand, the elasticity of the demand for the output that the labor is producing will influence the elasticity of the demand for labor. Other things equal, the greater the price elasticity of product demand, the greater the elasticity of resource demand. For example, suppose that the wage rate falls. This means a decline in the cost of producing the product and a drop in the product’s price. If the elasticity of product demand is great, the resulting increase in the quantity of the product demanded will be large and thus necessitate a large increase in the quantity of labor to produce the additional output. This implies an elastic demand for labor. But if the demand for the product is inelastic, the increase in the amount of the product demanded will be small, as will be the increases in the quantity of labor demanded. This suggests an inelastic demand for labor. Remember that the resource demand curve in Figure 12.1 is more elastic than the resource demand curve shown in Figure 12.2. The difference arises because in Figure 12.1 we assume a perfectly elastic product demand curve, whereas Figure 12.2 is based on a downsloping or less than perfectly elastic product demand curve. Ratio of Resource Cost to Total Cost The larger the proportion of total production costs accounted for by a resource, the greater the elasticity of demand for that resource. In the extreme, if labor cost is the only production cost, then a 20 percent increase in wage rates will shift all the firm’s cost curves upward by 20 percent. If product demand is elastic, this substantial increase in costs will cause a relatively large decline in sales and a sharp decline in the amount of labor demanded. So labor demand is highly elastic. But if labor cost is only 50 percent of production cost, then a 20 percent increase in wage rates will increase costs by only 10 percent. With the same elasticity of product demand, this will cause a relatively small decline in sales and therefore in the amount of labor demanded. In this case the demand for labor is much less elastic. (Key Question 5) Quick Review 12.2 • A resource demand curve will shift because of changes in product demand, changes in the productivity of the resource, and changes in the prices of other inputs. • If resources A and B are substitutable, a decline in the price of A will decrease the demand for B provided the substitution effect exceeds the output effect. But if the output effect exceeds the substitution effect, the demand for B will increase. • If resources C and D are complements, a decline in the price of C will increase the demand for D. • Elasticity of resource demand measures the extent to which producers change the quantity of a resource they hire when its price changes. Page 16 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: (1) • The elasticity of resource demand will be less the greater the difficulty of substituting other resources for the resource, the smaller the elasticity of product demand, and the smaller the proportion of total cost accounted for by the resource. Optimal Combination of Resources * * Note to Instructors: We consider this section to be optional. If desired, it can be skipped without loss of continuity. It can also be deferred until after the discussion of wage determination in the chapter that follows. So far, our main focus has been on one variable input, labor. But in the long run firms can vary the amounts of all the resources they use. That’s why we need to consider what combination of resources a firm will choose when all its inputs are variable. While our analysis is based on two resources, it can be extended to any number of inputs. We will consider two interrelated questions: • What combination of resources will minimize costs at a specific level of output? • What combination of resources will maximize profit? The Least-Cost Rule A firm is producing a specific output with the least-cost combination of resources when the last dollar spent on each resource yields the same marginal product. That is, the cost of any output is minimized when the ratios of marginal product to price of the last units of resources used are the same for each resource. In competitive resource markets, recall, marginal resource cost is the market resource price; the firm can hire as many or as few units of the resource as it wants at that price. Then, with just two resources, labor and capital, a competitive firm minimizes its total cost of a specific output when Equation 1 Throughout, we will refer to the marginal products of labor and capital as MP L and MP C , respectively, and symbolize the price of labor by P L and the price of capital by P C . A concrete example will show why fulfilling the condition in equation 1 leads to least-cost production. Assume that the price of both capital and labor is $1 per unit but that Siam Soups currently employs them in such amounts that the marginal product of labor is 10 and the marginal product of capital is 5. Our equation immediately tells us that this is not the least costly combination of resources: Page 17 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: Suppose Siam spends $1 less on capital and shifts that dollar to labor. It loses 5 units of output produced by the last dollar’s worth of capital, but it gains 10 units of output from the extra dollar’s worth of labor. Net output increases by 5 (= 10 – 5) units for the same total cost. More such shifting of dollars from capital to labor will push the firm down along its MP curve for labor and up along its MP curve for capital, increasing output and moving the firm toward a position of equilibrium where equation 1 is fulfilled. At that equilibrium position, the MP per dollar for the last unit of both labor and capital might be, for example, 7. And Siam will be producing a greater output for the same (original) cost. Whenever the same total-resource cost can result in a greater total output, the cost per unit—and therefore the total cost of any specific level of output—can be reduced. Being able to produce a larger output with a specific total cost is the same as being able to produce a specific output with a smaller total cost. If Siam buys $1 less of capital, its output will fall by 5 units. If it spends only $.50 of that dollar on labor, the firm will increase its output by a compensating 5 units . Then the firm will realize the same total output at a $.50 lower total cost. The cost of producing any specific output can be reduced as long as equation 1 does not hold. But when dollars have been shifted between capital and labor to the point where equation 1 holds, no additional changes in the use of capital and labor will reduce costs further. Siam will be producing that output using the least-cost combination of capital and labor. All the long-run cost curves developed in Chapter 8 and used thereafter assume that the least-cost combination of inputs has been realized at each level of output. Any firm that combines resources in violation of the least-cost rule would have a higher-than-necessary average total cost at each level of output. That is, it would incur X-inefficiency , as discussed in Figure 10.7. The producer’s least-cost rule is analogous to the consumer’s utility-maximizing rule described in Chapter 7. In achieving the utility-maximizing combination of goods, the consumer considers both his or her preferences as reflected in diminishing-marginal-utility data and the prices of the various products. Similarly, in achieving the cost-minimizing combination of resources, the producer considers both the marginal-product data and the price (costs) of the various resources. The Profit-Maximizing Rule Minimizing cost is not sufficient for maximizing profit. A firm can produce any level of output in the least costly way by applying equation 1. But only one unique level of output maximizes profit. Our earlier analysis of product markets showed that this profit-maximizing output occurs where marginal revenue equals marginal cost (MR = MC). Near the beginning of this chapter we determined that we could write this profit-maximizing condition as MRP = MRC as it relates to resource inputs. In a purely competitive resource market the marginal resource cost (MRC) is equal to the resource price P . Thus, for any competitive resource market, we have as our profit- maximizing equation Page 18 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: (2) MRP (resource) = P (resource) This condition must hold for every variable resource, and in the long run all resources are variable. In competitive markets, a firm will therefore achieve its profit-maximizing combination of resources when each resource is employed to the point at which its marginal revenue product equals its resource price. For two resources, labor and capital, we need both P L = MRP L and P C = MRP C We can combine these conditions by dividing both sides of each equation by their respective prices and equating the results to get Equation 2 Note in equation 2 that it is not sufficient that the MRPs of the two resources be proportionate to their prices; the MRPs must be equal to their prices and the ratios therefore equal to 1. For example, if MRP L = $15, P L = $5, MRP C = $9, and P C = $3, Siam is underemploying both capital and labor even though the ratios of MRP to resource price are identical for both resources. The firm can expand its profit by hiring additional amounts of both capital and labor until it moves down their downsloping MRP curves to the points at which MRP L = $5 and MRP C = $3. The ratios will then be 5/5 and 3/3 and equal to 1. The profit-maximizing position in equation 2 includes the cost-minimizing condition of equation 1. That is, if a firm is maximizing profit according to equation 2, then it must be using the least-cost combination of inputs to do so. However, the converse is not true: A firm operating at least cost according to equation 1 may not be operating at the output that maximizes its profit. Worked Problems W 12.2 Optimal combination of resources Numerical Illustration A numerical illustration will help you understand the least-cost and profit-maximizing rules. In columns 2, 3, 2′, and 3′ in Table 12.7 we show the total products and marginal products for various amounts of labor and capital that are assumed to be the only inputs Siam needs in producing its soup. Both inputs are subject to diminishing returns. Table 12.7 Data for Finding the Least-Cost and Profit-Maximizing Combination of Labor and Capital, Siam Soups * Page 19 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: * To simplify, it is assumed in this table that the productivity of each resource is independent of the quantity of the other. For example, the total and marginal products of labor are assumed not to vary with the quantity of capital employed. We also assume that labor and capital are supplied in competitive resource markets at $8 and $12, respectively, and that Siam soup sells competitively at $2 per unit. For both labor and capital we can determine the total revenue associated with each input level by multiplying total product by the $2 product price. These data are shown in columns 4 and 4′. They enable us to calculate the marginal revenue product of each successive input of labor and capital as shown in columns 5 and 5′, respectively. Producing at Least Cost What is the least-cost combination of labor and capital for Siam to use in producing, say, 50 units of output? The answer, which we can obtain by trial and error, is 3 units of labor and 2 units of capital. Columns 2 and 2′ indicate that this combination of labor and capital does, indeed, result in the required 50 (= 28 + 22) units of output. Now, note from columns 3 and 3′ that hiring 3 units of labor gives us and hiring 2 units of capital gives us . So equation (1) is fulfilled. How can we verify that costs are actually minimized? First, we see that the total cost of employing 3 units of labor and 2 of capital is $48 [= (3 × $8) + (2 × $12)]. Other combinations of labor and capital will also yield 50 units of output, but at a higher cost than $48. For example, 5 units of labor and 1 unit of capital will produce 50 (= 37 + 13) units, but total cost is higher, at $52 [= (5 × $8) + (1 × $12)]. This comes as no surprise because 5 units of labor and 1 unit of capital violate the least-cost rule— , . Only the combination (3 units of labor and 2 units of capital) that minimizes total cost will satisfy equation 1. All other combinations capable of producing 50 units of output violate the cost-minimizing rule, and therefore cost more than $48. Maximizing Profit Will 50 units of output maximize Siam’s profit? No, because the profit-maximizing terms of equation 2 are not satisfied when the firm employs 3 units of labor and 2 of capital. To Page 20 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: maximize profit, each input should be employed until its price equals its marginal revenue product. But for 3 units of labor, labor’s MRP in column 5 is $12 while its price is only $8. This means the firm could increase its profit by hiring more labor. Similarly, for 2 units of capital, we see in column 5′ that capital’s MRP is $18 and its price is only $12. This indicates that more capital should also be employed. By producing only 50 units of output (even though they are produced at least cost), labor and capital are being used in less-than-profit- maximizing amounts. The firm needs to expand its employment of labor and capital, thereby increasing its output. Table 12.7 shows that the MRPs of labor and capital are equal to their prices, so equation 2 is fulfilled when Siam is employing 5 units of labor and 3 units of capital. So this is the profit -maximizing combination of inputs. 2 The firm’s total cost will be $76, made up of $40 (= 5 × $8) of labor and $36 (= 3 × $12) of capital. Total revenue will be $130, found either by multiplying the total output of 65 (= 37 + 28) by the $2 product price or by summing the total revenues attributable to labor ($74) and to capital ($56). The difference between total revenue and total cost in this instance is $54 (= $130 – $76). Experiment with other combinations of labor and capital to demonstrate that they yield an economic profit of less than $54. 2 Because we are dealing with discrete (nonfractional) units of the two outputs here, the use of 4 units of labor and 2 units of capital is equally Profitable. The fifth unit of labor’s MRP and its price (cost) are equal at $8, so that the fifth labor unit neither adds to nor subtracts from the firm’s Profit; similarly, the third unit of capital has no effect on Profit. Note that the profit-maximizing combination of 5 units of labor and 3 units of capital is also a least-cost combination for this particular level of output. Using these resource amounts satisfies the least-cost requirement of equation 1 in that and . (Key Questions 6 and 7) Marginal Productivity Theory of Income Distribution Our discussion of resource pricing is the cornerstone of the controversial view that fairness and economic justice are one of the outcomes of a competitive capitalist economy. Table 12.7 demostrates, in effect, that workers receive income payments (wages) equal to the marginal contributions they make to their employers’ outputs and revenues. In other words, workers are paid according to the value of the labor services that they contribute to production. Similarly, owners of the other resources receive income based on the value of the resources they supply in the production process. In this marginal productivity theory of income distribution , income is distributed according to contribution to society’s output. So, if you are willing to accept the proposition “To each according to the value of what he or she creates,” income payments based on marginal revenue product provide a fair and equitable distribution of society’s income. Origin of the Idea O 12.2 Marginal productivity theory of distribution Page 21 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: This sounds reasonable, but you need to be aware of serious criticisms of this theory of income distribution: • Inequality Critics argue that the distribution of income resulting from payment according to marginal productivity may be highly unequal because productive resources are very unequally distributed in the first place. Aside from their differences in mental and physical attributes, individuals encounter substantially different opportunities to enhance their productivity through education and training and the use of more and better equipment. Some people may not be able to participate in production at all because of mental or physical disabilities, and they would obtain no income under a system of distribution based solely on marginal productivity. Ownership of property resources is also highly unequal. Many owners of land and capital resources obtain their property by inheritance rather than through their own productive effort. Hence, income from inherited property resources conflicts with the “To each according to the value of what he or she creates” idea. Critics say that these inequalities call for progressive taxation and government spending programs aimed at creating an income distribution that will be more equitable than that which would occur if the income distribution were made strictly according to marginal productivity. • Market imperfections The marginal productivity theory of income distribution rests on the assumptions of competitive markets. But, as we will see in Chapter 13, not all labor markets are highly competitive. In some labor markets employers exert their wage- setting power to pay less-than-competitive wages. And some workers, through labor unions, professional associations, and occupational licensing laws, wield wage-setting power in selling their services. Even the process of collective bargaining over wages suggests a power struggle over the division of income. In wage setting through negotiations, market forces—and income shares based on marginal productivity—may get partially pushed into the background. In addition, discrimination in the labor market can distort earnings patterns. In short, because of real-world market imperfections, wage rates and other resource prices are not always based solely on contributions to output. Last Word: Input Substitution: The Case of ATMs Banks Are Using More Automatic Teller Machines (ATMs) and Employing Fewer Human Tellers . As you have learned from this chapter, a firm achieves its least-cost combination of inputs when the last dollar it spends on each input makes the same contribution to total output. This raises an interesting real-world question: What happens when technological advance makes available a new, highly productive capital good for which MP/ P is greater than it is for other inputs, say, a particular type of labor? The answer is that the least-cost mix of resources abruptly changes, and the firm responds accordingly. If the new capital is a substitute for labor (rather than a complement), the firm replaces the particular type of labor with the new capital. That is exactly what is happening in the banking industry, in which ATMs are replacing human bank tellers. Page 22 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: © age fotostock/SuperStock ATMs made their debut about 37 years ago when U.S. firms Docutel and Diebold each introduced the product. Today, Diebold and NCR (also a U.S. firm) dominate global sales, with the Japanese firm Fujitsu being a distant third. The number of ATMs and their usage have exploded, and currently there are nearly 400,000 ATMs in the United States. In 1975, about 10 million ATM transactions occurred in the United States. Today there are about 11 billion U.S. ATM transactions each year. ATMs are highly productive: A single machine can handle hundreds of transactions daily, thousands weekly, and millions over the course of several years. ATMs can not only handle cash withdrawals but also accept deposits and facilitate switches of funds between various accounts. Although ATMs are expensive for banks to buy and install, they are available 24 hours a day, and their cost per transaction is one- fourth the cost for human tellers. They rarely get “held up,” and they do not quit their jobs (turnover among human tellers is nearly 50 percent per year). Moreover, ATMs are highly convenient; unlike human tellers, they are located not only at banks but also at busy street corners, workplaces, universities, and shopping malls. The same bank card that enables you to withdraw cash from your local ATM also enables you to withdraw pounds from an ATM in London, yen from an ATM in Tokyo, and even rubles from an ATM in Moscow. (All this, of course, assumes that you have money in your checking account!) In the terminology of this chapter, the more productive, lower-priced ATMs have reduced the demand for a substitute in production—human tellers. Between 1990 and 2000, an estimated 80,000 human teller positions were eliminated, and more positions will disappear by 2010. Where will the people holding these jobs go? Most will eventually move to other occupations. Although the lives of individual tellers are disrupted, society clearly wins. Society obtains more convenient banking services as well as the other goods that these “freed-up” labor resources help produce. Source: Based partly on Ben Craig, “Where Have All the Tellers Gone?” Federal Reserve Bank of Cleveland, Economic Commentary , Apr. 15, 1997; and statistics provided by the American Bankers Association. Page 23 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: Summary 1. Resource prices help determine money incomes, and they simultaneously ration resources to various industries and firms. 2. The demand for any resource is derived from the product it helps produce. That means the demand for a resource will depend on its productivity and on the market value (price) of the good it is producing. 3. Marginal revenue product is the extra revenue a firm obtains when it employs 1 more unit of a resource. The marginal revenue product curve for any resource is the demand curve for that resource because the firm equates resource price and MRP in determining its profit-maximizing level of resource employment. Thus each point on the MRP curve indicates how many resource units the firm will hire at a specific resource price. 4. The firm’s demand curve for a resource slopes downward because the marginal product of additional units declines in accordance with the law of diminishing returns. When a firm is selling in an imperfectly competitive market, the resource demand curve falls for a second reason: Product price must be reduced for the firm to sell a larger output. The market demand curve for a resource is derived by summing horizontally the demand curves of all the firms hiring that resource. 5. The demand curve for a resource will shift as the result of (a) a change in the demand for, and therefore the price of, the product the resource is producing; (b) changes in the productivity of the resource; and (c) changes in the prices of other resources. 6. If resources A and B are substitutable for each other, a decline in the price of A will decrease the demand for B provided the substitution effect is greater than the output effect. But if the output effect exceeds the substitution effect, a decline in the price of A will increase the demand for B. 7. If resources C and D are complementary or jointly demanded, there is only an output effect; a change in the price of C will change the demand for D in the opposite direction. 8. The majority of the 10 fastest-growing occupations in the United States—by percentage increase—relate to health care, computers, and veterinary care (review Table 12.5); the 10 most rapidly declining occupations by percentage decrease, however, are more mixed (review Table 12.6). 9. The elasticity of demand for a resource measures the responsiveness of producers to a change in the resource’s price. The coefficient of the elasticity of resource demand is When E rd is greater than 1, resource demand is elastic; when E rd is less than 1, resource demand is inelastic; and when E rd equals 1, resource demand is unit-elastic. 10. The elasticity of demand for a resource will be greater (a) the greater the ease of substituting other resources for labor, (b) the greater the elasticity of demand for the Page 24 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: product, and (c) the larger the proportion of total production costs attributable to the resource. 11. Any specific level of output will be produced with the least costly combination of variable resources when the marginal product per dollar’s worth of each input is the same—that is, when 12. A firm is employing the profit-maximizing combination of resources when each resource is used to the point where its marginal revenue product equals its price. In terms of labor and capital, that occurs when the MRP of labor equals the price of labor and the MRP of capital equals the price of capital—that is, when 13. The marginal productivity theory of income distribution holds that all resources are paid according to their marginal contribution to output. Critics say that such an income distribution is too unequal and that real-world market imperfections result in pay above and below marginal contributions to output. Terms and Concepts derived demand marginal product (MP) marginal revenue product (MRP) marginal resource cost (MRC) MRP = MRC rule substitution effect output effect elasticity of resource demand least-cost combination of resources profit-maximizing combination of resources marginal productivity theory of income distribution Study Questions 1. What is the significance of resource pricing? Explain how the factors determining resource demand differ from those determining product demand. Explain the meaning and significance of the fact that the demand for a resource is a derived demand. Why do resource demand curves slope downward? LO1 2. KEY QUESTION At the bottom of the page, complete the labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market. LO2 Page 25 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: a. How many workers will the firm hire if the market wage rate is $27.95? $19.95? Explain why the firm will not hire a larger or smaller number of units of labor at each of these wage rates. b. Show in schedule form and graphically the labor demand curve of this firm. c. Now again determine the firm’s demand curve for labor, assuming that it is selling in an imperfectly competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower product price by 5 cents in order to sell the marginal product of each successive labor unit. Compare this demand curve with that derived in question 2 b . Which curve is more elastic? Explain. 3. Suppose that marginal product tripled while product price fell by one-half in Table 12.1. What would be the new MRP values in Table 12.1? What would be the net impact on the location of the resource demand curve in Figure 12.1? LO2 4. In 2005 General Motors (GM) announced that it would reduce employment by 30,000 workers. What does this decision reveal about how it viewed its marginal revenue product (MRP) and marginal resource cost (MRC)? Why didn’t GM reduce employment by more than 30,000 workers? By fewer than 30,000 workers? LO3 5. KEY QUESTION What factors determine the elasticity of resource demand? What effect will each of the following have on the elasticity or the location of the demand for resource C, which is being used to produce commodity X? Where there is any uncertainty as to the outcome, specify the causes of that uncertainty. LO4 a. An increase in the demand for product X. b. An increase in the price of substitute resource D. c. An increase in the number of resources substitutable for C in producing X. d. A technological improvement in the capital equipment with which resource C is combined. e. A fall in the price of complementary resource E. f. A decline in the elasticity of demand for product X due to a decline in the competitiveness of product market X. 6. KEY QUESTION Suppose the productivity of capital and labor are as shown in the accompanying table. The output of these resources sells in a purely competitive market for $1 per unit. Both capital and labor are hired under purely competitive conditions at $3 and $1, respectively. LO5 Page 26 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: a. What is the least-cost combination of labor and capital the firm should employ in producing 80 units of output? Explain. b. What is the profit-maximizing combination of labor and capital the firm should use? Explain. What is the resulting level of output? What is the economic profit? Is this the least costly way of producing the profit- maximizing output? 7. KEY QUESTION In each of the following four cases, MRP L and MRP C refer to the marginal revenue products of labor and capital, respectively, and P L and P C refer to their prices. Indicate in each case whether the conditions are consistent with maximum profits for the firm. If not, state which resource (s) should be used in larger amounts and which resource(s) should be used in smaller amounts. LO5 Units of Labor Total Product Marginal Product Product Price Total Revenue Marginal Revenue Product 0 0 ______ $2 $______ $______ 1 17 ______ 2 ______ ______ 2 31 ______ 2 ______ ______ 3 43 ______ 2 ______ ______ 4 53 ______ 2 ______ ______ 5 60 ______ 2 ______ ______ 6 65 2 ______ a. MRP L = $8; P L = $4; MRP C = $8; P C = $4 b. MRP L = $10; P L = $12; MRP C = $14; P C = $9 c. MRP L = $6; P L = $6; MRP C = $12; P C = $12 d. MRP L = $22; P L = $26; MRP C = $16; P C = $19 8. Florida citrus growers say that the recent crackdown on illegal immigration is increasing the market wage rates necessary to get their oranges picked. Some are turning to $100,000 to $300,000 mechanical harvesters known as “trunk, shake, and catch” pickers, which vigorously shake oranges from the trees. If widely adopted, what will be the effect on the demand for human orange pickers? What does that imply about the relative strengths of the substitution and output effects? LO5 Page 27 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html

Machine generated alternative text: 9. LAST WORD Explain the economics of the substitution of ATMs for human tellers. Some banks are beginning to assess transaction fees when customers use human tellers rather than ATMs. What are these banks trying to accomplish? Web-Based Questions 1. SELECTED OCCUPATIONS—WHAT ARE THEIR EMPLOYMENT OUTLOOKS? Use the A to Z index in the Bureau of Labor Statistics Occupational Outlook , at www.bls.gov/oco/ , to determine the general and specific employment outlooks for ( a ) textile machinery operators, ( b ) financial managers, ( c ) computer operators, and ( d ) dental hygienists. Why do these job outlooks differ? 2. THE OVERALL DEMAND FOR LABOR—IN WHICH COUNTRIES HAS IT INCREASED THE MOST? In countries where real wages are steady or rising, increases in total employment reflect increases in labor demand. Go to the Bureau of Labor Statistics Web site, www.bls.gov/fls , and select Comparative Civilian Labor Force Statistics. Calculate the percentage increases in civilian employment for the United States, Japan, Germany, France, Great Britain, Italy, and Canada for the most recent 10- year period. Which three countries have had the greatest growth of labor demand, as measured by the percentage change in employment? Which three the smallest? FURTHER TEST YOUR KNOWLEDGE AT www.mcconnell18e.com Economics Chapter 12: The Demand for Resources ISBN: 9780073375694 Authors: Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn Copyright © McGraw-Hill Company (2009) Page 28 of 28 7/ 25/ 2013 https://portal.phoenix.edu/medialibrary/embedreader.urn:isbn:9780073375694:ch12.html