ch27.docx

Chapter 27 Marginal Revenue Produce (MRP) The derived nature of resource demand mans that 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 Resulting Total Product (output) provides the Marginal Product, or additional output, resulting from using each additional unit of labor Marginal Revenue Product = Change in total revenue/Unit change in resource quantity Marginal Revenue Cost = Chang in total (resource) cost/unit change in resource quantity Total Revenue = Total Product (Output) X Product Price (usually constant) MRP, the difference between each unit of TR In the purely competitive seller?s demand for a resource, the MRP curve IS the resource demand curve (MRP=D (resource price, or wage rate)). Product price is constant and downward slope. [Law of diminishing marginal returns] In an imperfectly competitive seller?s demand curve for a resource, the resource demand curve slops downward because both marginal product and product price fall as resource employment and output rise. This downward slope is greater than purely competitive seller because the pure competitor can sell the added output at a constant price. To maximize profit MRP=MRC Change in the prices of other resources Substitute resources Substitute effect ? the decline in the price of machinery prompts the firm to substitute machinery for labor. The substitution effect decreases the demand for labor. Output effect ? because the price of machinery has fallen, the costs of producing various output must also decline. With lower costs, the firm finds it profitable to produce and sell a greater output. 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. D increases if the substitution effect exceeds the output effect, vice versa. The least-cost rule When the last dollar spent on each resource yields the same marginal product. MP of labor/Price of Labor = MP of Capital/Price of Capital Profit-maximizing equation MRP (resource) = P (resource)