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| QUICK REVIEW 27-1 |
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- To maximize profit a firm will use a resource in
an amount at which the resource's marginal revenue product equals its marginal resource
cost (MRP5 MRC).
- Application of the MRP 5 MRC rule to a firm's MRP
curve demonstrates that the MRP curve is the firm's resource demand curve. In a purely
competitive resource market
resource price (the wage rate) equals MRC.
- The resource demand curve of a purely competitive
seller is downsloping solely because the marginal product of the resource diminishes; the
resource demand curve of an imperfectly competitive seller is downsloping because marginal
product diminishes and product price falls as output is increased.
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| QUICK REVIEW 27-2 |
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- A resource demand curve will shift because of
changes in product demand
changes in the productivityof the resource
and changes in the
prices of other inputs.
- If resources A and B are substitutable
a decline
in the price of A will decrease the demand for B provided the substitution effect exceeds
the output effect. But if the output effect exceeds the substitution effect
the demand
for B will increase.
- If resources C and D are complements
a decline
in the price of C will increase the demand for D.
- Elasticity of resource demand measures the extent
to which producers change the quantity of a resource they hire when its price changes.
- The elasticity of resource demand will be less
the more rapid the decline in marginal product
the smaller the number of substitutes
the
smaller the elasticity of product demand
and the smaller the proportion of total cost
accounted for by the resource.
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