Unit 7 Study Guide: Resource Markets

7a: Analyze how the demand and supply technique works for the resource markets.

    • Define marginal revenue product and marginal factor cost.
    • What optimization rule do companies follow to decide how many employees to hire?
    • How can we reconcile this optimization rule with the rule we studied for profit optimization, Marginal Revenue = Marginal Cost?

How do companies decide how much of their resources to use (such as land, labor, capital, or entrepreneurial ability) to produce a final good and at what price? Businesses calculate their demand for resources based on the demand consumers have for the final goods. For example, if consumer demand for cars (the final good) increases, demand for steel, parts, and other resources used to produce cars also increases.

Review supply and demand in resource markets in the following resources.

Labor Market

When we talk about supply and demand in the labor market, we need to clearly identify the buyers and sellers of labor. If you are looking for a job, you are a supplier or seller of labor: you are represented in the labor supply curve. A business that wants to hire employees buys labor: the company is represented in the labor demand curve. The wage rate is the price or cost of labor.

Review the labor market in the video How Many People to Hire Given the MPR Curve from Khan Academy.

    • Define capital market and money market;
    • Define stock and bond;
    • Define primary market and secondary market;

As with our product market analysis of supply and demand, we can also identify shifters of labor demand. Note that a fluctuation in the wage rate leads to a change in the quantity of labor demanded, shown as a movement along the demand curve. A change in any other determinant of labor demand will shift the demand curve.

A labor demand shifter causes a fluctuation in overall labor demand, irrespective of price (wages). Examples of labor demand shifters include changes in:

      • Use of complementary or substitute factors of production: a new population of workers moves in the area or a local school closes which causes employees with children to leave.
      • Changes in product demand: local businesses begin outsourcing package fulfillment company when they cannot meet increased consumer demand for overnight shipping; and
      • Technology or innovation: a new robot is created to perform the repetitive tasks employees had been hired to perform;
      • The number of companies hiring: more package fulfillment businesses open their doors to meet the increased demand for overnight shipping.

Review these factors and their impact on labor demand in Wages and Employment in Perfect Competition from Principles of Microeconomics.

Financial Markets

Financial markets are important for firms and individuals as they provide financial resources for optimal decision making. In the United States, several formal marketplaces have formed where individuals and groups of corporate investors can trade shares or investment portfolios in various businesses or commodities. Note that economists examine financial markets in more detail in macroeconomics.

    • What is the optimal resource use?
    • How do economists derive the resource demand curve and what are the shifters of demand?

Land and Natural Resources

Economists use many of the same methods they use to analyze land and natural resources as they do for the labor market. As with labor, businesses consider land and natural resources as factors of production. The companies that need to use the land and resources as inputs for production are the primary buyers of resources: they drive demand. The sellers of resources are the landowners, corporations, local governments, or federal agencies that own them.

Unit 7 Vocabulary

      • Bond market
      • Capital market
      • Complementary factors of production
      • Derived demand
      • Labor demand
      • Labor market
      • Marginal factor cost
      • Marginal revenue product
      • Money market
      • Natural resource
      • New York Stock Exchange (NYSE)
      • Optimization rule
      • Primary market
      • Product market
      • Secondary market
      • Stock market
      • Substitute factor of production
Last modified: Wednesday, July 17, 2019, 7:11 PM