Competitive Resource Markets and Efficiency

I. Introduction

A. Factors of Production
1. land
2. labor
3. capital
4. entrepreneurial ability

B. Circular Flow reversal of roles

1. product market -- 4 models
2. resource market -- 8 models
3. comparison of graphs -- product and resource markets

C. Significance of Resource Pricing
(Why Study Resource Markets?)

1. money incomes
2. resource allocation -- allocative efficiency
3. cost minimization -- productive efficiency
4. policy issues -- equity

II. Benefit-Cost Analysis and the Hiring of Resources
(Marginal Productivity Theory of Resource Demand)

A. Benefit-Cost Analysis -- Review

B. Rule for Employing Resources "The Sugar Shack"

1. question how many dancers to hire?
2. goal profit maximization
3. assumptions
a. dancers are the only variable resource
b. competitive product market -- characteristics
c. competitive resource market -- characteristics

4. marginal revenue product (MRP) as additional benefits

a. definition
b. calculation
c. graph

5. MRC as additional costs

a. definition
b. why wage = MRC

6. how many dancers to hire?

a. MRP = MRC
b. check to see if profits are maximized

III. MRP is the Resource Demand Schedule

A. What is Demand?

B. Market Demand

C. Changes in Resource Demand Determinants

1. changes in product demand derived demand
a. Pe
b. Pog
c. Y
d. N
e. T

2. productivity changes

a. define productivity (MP)
b. factors that affect productivity
(1) nonlabor inputs
(2) technological progress
(3) labor quality

3. changes in the prices of other resources

a. substitute resources
1) substitution effect
2) output effect

b. complementary resources

D. Price Elasticity of Resource Demand

1. rate of MP decline
2. ease of resource substitutability
3. elasticity of product demand
4. labor-cost to total-cost ratio

IV. Marginal Productivity Theory of Income Distribution

A. Explanation

B. Criticism

1. inequality
2. monopsony and monopoly