62 The Demand for Inputs
The demand for an input is determined by the relative value of the good produced and the productivity of the input. The demand for an input can be derived by using the production function (the MP for an input) and the price of the good. The production process was described by a production function. In its simplistic form it is: Q = f(labour, kaptial, land, technology, . . . ) The marginal product of each factor describes the contribution of each factor to the production of the output. The marginal product of a factor can be described as:
MPF ≡ ∆Q / ∆F If the marginal products are known and the relative prices of goods in the markets reflect the values of the outputs, the value of each factors contribution can be calculated as the product of MPF and the price of the output. The change in the value of the output associated with a change in an input is called the value of marginal product (VMP) or the marginal revenue product (MRP). Originally the VMP was used to describe the demand for an input into production process for a purely competitive firm and the MRP was used to describe the demand for an input used to produce a product where market power (a negatively sloped product demand) existed. Most texts currently use MRP as a generic term that covers both VMP and MRP.
The price elasticity of demand for a resource depends on: 1the price elasticity of demand for the final product; 2this resource share of the firm’s total costs 3close substitutes for the resource 4time period is considered
Determinants of resource demand:1the price of the final product rises 2the productivity of the resource 3the number of buyers 4the price of a substitute resource 5the price of a complementary resource
The constant price at all levels of output is the result of the firm being in a purely competitive market; the demand faced by the firm is perfectly elastic.
The marginal revenue product is a measure of the value of the output that is attributable to each unit of the input. The MRP of each unit of input is the maximum an employer would be willing to pay each unit of input and can be interpreted as a demand function.
Note that the price of the output must be decreased if more units are to be sold. This makes the demand for the input relatively more inelastic.
Summary: Marginal revenue product (MRP) = additional revenue associated with the use of an additional unit of a resource. Marginal factor cost (MFC) = additional cost associated with the use of an additional unit of a resource.
Increase resource use if MRP > MFC Decrease resource use if MRP < MFCOptimal level of resource use: MRP = MFC
Under Multiple resources a cost-minimizing firm selects a mix of resources at which the ratio of the MRP to the MFC is the same for all resources.
63 Supply of Inputs
The individual agent who owns the input will decide how much of a factor they want to offer for sale at each price offered for the input. A worker must decide how many units of labour (hours, days, weeks, years, etc) they will offer for sale at each possible wage rate. The supply of labour is a function of the wage rate, the value of leisure, alternatives available, taxes and other circumstances.
Generally it is believed that more labour will be offered for sale at higher wage rates, up to a point. Owners of other factors of production (land, capital, entrepreneurial ability) make decisions that determine the supply functions of those factors. Any individual worker's supply of labor will depend on her or his opportunity for income from sources other than labor and on her or his preferences between leisure and earning income. When we look at the supply of labor from the point of view of the economy as a whole, this can lead to some surprises. Some economists argue that the labor supply curve could slope backward, for at least a part of its range.
When people earn a higher wage per hour, they can earn more income for working the same or even fewer hours. When people can "have it all," they often choose to do just that – have more of all the good things. Thus, when wages per hour of labor rise, people are getting better off, and eventually they decide to take some of their increased potential income in the form of leisure rather than money. That means the quantity of labor supplied – in hours per year – is less, and the labor supply curve slopes backward (as shown) at the higher wage levels.
When we look at the supply of labor to a particular industry, we don't need to worry about this. For example, when wages paid by the potato growing industry are low, most people will find that they can make more money in other industries, and so they don't supply labor to the potato industry. When potato grower wages rise, some of those people will find that they now can earn more in the potato industry than in their alternatives, and will switch their labor supply into the potato industry. Thus, the supply curve of labor to the potato industry will be upward sloping. Since the supply of labor to a particular industry is dominated by this switching-back-and-forth from other industries, the supply curve of labor to an individual industry will usually be upward sloping, From now on, we will show them as upward sloping.