Question

the resource market is the same as the product market except that, in the resource market, a. the demand curve slopes up b. buyers and sellers are reversed c. there is no substitution effect d. the supply curve slopes down

Answer 1

First of all it is important to distinguish between a resource market and a product market.

A product market is the market for finished goods and services.In these markets,commodities for direct consumption are sold. It does not include intermediate products or raw materials.These goods are provided by firms.

A resource market is where these firms can purchase resources such as labor, capital,technological inputs,raw materials to produce goods and services.

This can be illustrated with an example of bread. Bread is made using flour,water,etc. It requires machines to knead dough and give a bread its definite shape. The market from where flour, water, machines and labor required in the process were bought is the resource market. This bread if used for final consumption, bought by consumers, sells in the product market.

Coming back to our question, both the product and resource market sell commodities(if we consider the labour market as well.).Hence, the demand curve is downward sloping (as price increases,demand for bread,flour,capital will fall;as wages rise demand for labour will fall) and supply curve upward slopping in both markets.

There is substitution affect in both markets. In the resource market if wages rise, firms will substitute labour for capital. In the product market if the price of wheat bread rises, people will substitute wheat bread for oats.

However in the resource market, buyers and sellers are reversed. In the product market, the consumers are the buyers and the firm is the seller. In the resource market,the firm is the buyer of resources such as labour and capital,and other commodities from the market that in a closed economy are supplied by the consumers themselves.

Option b. is correct.