April 22 - Resource Market Part 1 Continued

Today we will finish up the first power point on the resource market.  Here's the ppt again:

Resource Market Part 1

The second half of the power point introduces us to two new variables.  Except in a way they are not new at all, they are just new versions of old variables.

The first of these is Marginal Revenue Product or MRP.  Let's break it down word by word.

Marginal means additional.  Revenue is the money that you get when you sell a product.  And in this case Product really means production or the amount of product being produce.

Put that all together and Marginal Revenue Product means what is the Additional Revenue we get for producing another unit of a good.  In other words, how much more money do we earn buy producing one more.

This is very similar to Marginal Product (MP) or Marginal Physical Product (MPP).

MPP is a measure of how much more production do you get when you add a resource.

MRP is a measure of how much more money do you get when you add a resource.

The formula for MPP is:

MPP =  ΔQ/ΔL

The formula for MRP is:

MRP = ΔTR/ΔL

This formula is for finding the MRP when the resource you are adding is labor.  If we were looking at a resource other than labor, the bottom of our fraction would be the change in that resource.

(Notice how this formula fits with our basic "Marginal" formula.  Marginal is always Change in Total divided by Change in Quantity.)

The second new variable we need to learn has three different names.  They are:

Marginal Resource Cost (M RC)

Marginal Factor Cost (MFC)

Marginal Cost of Labor (MCL)

Two of these names are literally the exact same variable.  MRC and MFC mean exactly the same thing.  How much more will it cost me to add one more of a resource/factor of production.

MCL means the same thing, but it only applies to labor.  How much more will it cost me to add one more unit of labor (which is a resource/factor of production.)

If you are talking about labor, you can use any one of these three variables.  If you get one of the rare questions in which the resource in question is NOT labor, then you cannot use MCL.

The formula for MFC/MRC/MCL is yet another version of our root "Marginal" formula.   Marginal is always Change in Total divided by Change in Quantity.

MFC = ΔTotal Factor Cost / ΔQuantity of that Factor;  shortening that down we get

MFC/MRC = ΔTC/ΔQ

For MCL we can be more specific.

MCL = ΔTC/ΔL

So there you have it.  Two new variables.  Why are they important?

What's the golden rule of Econ?

You should keep doing something until the Marginal Benefit is equal to the Marginal Cost.

The corollary of that rule for the Resource Market is that you should continue adding units of a resource until the Marginal Revenue Produced by that new resource is equal to the Marginal Cost of adding that resource.  In other words keep adding a resource until

MRP = MFC    or     MRP = MRC

If we are specifically talking about labor we can say

MRP = MCL

Note that it is really still the golden rule of econ, it's just been made more specific for the Resource Market.

The notes go into more depth about filling out a chart.   Tomorrow I'll have a chart for you to practice with.  Then next week we will look at the second part of Resource Demand, which will include graphs!