5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Determinants of Resource Demand

The demand for the goods themselves is an important determinant of resource demand,

but not the only determinant.

• Product demand.An increase in the demand for textiles—towels, for example—results in an
  increased price of those goods. The higher price increases the marginal revenue product of
  resources used in the production of textiles (e.g., textile workers), and this shifts the demand
  for those resources to the right. Of course, this works in the opposite direction and is prob-
  ably a more accurate story of what has happened to textile workers in the United States.


• Productivity(output per resource unit). If the productivity of the resource increases, the firm
  has a profit motive to take advantage of that heightened productivity and the demand for
  the resource should increase. Productivity of a resource is affected by a few different factors:
  
  
  1. Quantity of other resources. Give workers more equipment to help production and
     labor’s productivity can be increased. If Molly were to provide her workers with a
     larger workspace or more manual juicers or pitchers or stirring spoons or measur-
     ing cups, they might achieve increased output per worker.
  
  
  2. Technical progress. Better technology with which to work can increase labor’s pro-
     ductivity. Rather than using manual lemon squeezers, Molly invests in electric
     squeezers that allow for a given number of employees to produce more lemonade
     every hour.
  
  
  3. Quality of variable resources. Fertile farmland in the Midwest is a huge productivity
     advantage over the same acreage of farmland in Nevada. A more educated and
     trained workforce is an improvement in the quality of the labor and therefore pro-
     vides more productivity. Maybe Molly employs only those who have completed
     daylong training at the local community college.
  
  
  
  


• Prices of other resources.Employers hire several different resources, so the demand for one
  (labor) often depends upon the prices of the others.
  
  
  1. Substitute resources. If the price of a substitute resource—machinery, for example—
     falls, it has two competing effects on the demand for labor.
     a. Substitution effect (SE). Because machinery is now relatively less expensive, the
     firm uses more machinery and decreases demand for labor. For Molly, a lower
     price of electric lemon squeezers would put pressure on her to decrease the
     demand for labor.
  
  
  
  

144 á Step 4. Review the Knowledge You Need to Score High

MRPL (p = $.50)

$

Quantity Labor

W =10

MRPL (p = $1.00)

34

Figure 10.2

“Keep answers

crisp, graphs

labeled, and you

are on your way

to a 5.”

—Navin,

AP Student

http://www.ebook3000.com