Question

Question 1. What is the significance of resource pricing? Explain the meaning and significance of the fact that the demand for a resource is a derived demand. Why do resource demand curves slope downward? LO1

Question 2. What factors determine the elasticity of resource demand? What effect will each of the following have on the elasticity of the demand for resource C, which is being used to produce commodity X? LO4

a. An increase in the demand for product X.

b. An increase in the price of substitute resource D.

c. An increase in the number of resources substitutable for C in producing X.

d. A technological improvement in the capital equipment with which resource C is combined.

e. A fall in the price of complementary resource E.

f. A decline in the elasticity of demand for product X.

Question 3. Florida citrus growers say that the recent crackdown on illegal immigration is increasing the market wage rates necessary to get their oranges picked. Some are turning to $100,000 to $300,000 mechanical harvesters known as “trunk, shake, and catch” pickers, which vigorously shake oranges from the trees. If widely adopted, what will be the effect on the demand for human orange pickers? What does that imply about the relative strengths of the substitution and output effects? LO5

Question 4. LAST WORD Explain the economics of the substitution of ATMs for human tellers. Some banks are beginning to assess transaction fees when customers use human tellers rather than ATMs. What are these banks trying to accomplish?

Answer 1

1. All the resources that enter into production are owned by someone including the most important resource of all for most people, self owned labor.

Significance of resource pricing:

• It largely determines people's income.
• It allocates scarce resources among alternative uses
• Firms take account of the prices of resources in deciding how best to attain least cost production.
• Also, it has great deal to do with income inequality.

The debate as to what governmnet should do or not do to lessen income inequaity. It is here that the factors that detrmine the resource demand are most different than those which decides the demand for that product. Demand for product is basically a question of income and choice. But resource demnad is more passive in the sense that it is derived from the demand for the products, the resource can produce. If the resource can't be used for the production of the desired product, there will not be any demnad for the product.

Also, the reosurce are less mobile than the products, so their geographic location relative to demand for output they produce may be an important factor in determining demand for resources in particular geographc area. Resources which are factors of production are not hired or bought because their employer or buyer deserves them for themselves. The demand for resourecs is entirely derived from from what the firm believs that the resource can produce. If there were no demnad for the output there would be no demand for the input.

Downward slope: The demand for resources depend on how productive it is in producing output and on the price of the output. The demand for resource is downward sloping because of the dimininsng marginal product of the resource and in imperfectly competetive markets, also because greater the output, the lower is its price.