Resource Demand Part 2
The first part of the notes is about graphing.
We don't really need to talk about graphing the resource market, because we already know what every market graph looks like. It's a standard "X" graph.
We are now going to learn about graphing resource demand for an individual firm. (We will learn about graphing resource supply for a firm next week.)
The short version is that it is a standard downward sloping Demand line. There's some finer nuance about how sloped the demand line is, but we don't really need to worry about that.
So, it's that simple. When making a graph for an individual firm, the Demand line is just a standard downward sloping D line. (Don't worry, the Supply lines will be more difficult.)
Next up, DETERMINANTS !!!!!!!!!!!
Yep, you guessed it. Just like in the product market there are determinants of demand in the resource market. They fall into three broad categories. I don't have a spiffy acronym, so you just got to memorize these.
Determinants of Resource Demand
1. Changes to Quantity in the Product Market
2. Changes in Productivity in the Resource Market
3. Changes in the Price of Other Resources
1) The first set of determinants is Changes to the Quantity in the Product Market. We've touched on this before when we talked about derived demand. Anything that changes the quantity of our product means we will need more or less workers to make that product.
Example: We have a factory that makes cars. Thus we have supply and demand for cars in the product market. We also have supply and demand for labor used to make those cars in the resource market.
In the PRODUCT market, if either the Supply OR the Demand moves, we will end up needing a new quantity of cars. When the quantity of cars changes that will change how many workers we need. It will change our DEMAND for labor.
Note that it doesn't matter what line moved in the product market. Whether it was the demand for cars OR the supply for cars, it will end up moving the DEMAND for workers.
Saying that a different way. ALL of the Determinants of Demand and ALL of the Determinants of Supply in the PRODUCT market will change Demand in the RESOURCE Market.
2) The second set of determinants is Changes in Productivity in the Resource Market. This breaks down into three subcategories.
a) Changes in the Quantity of other resources. In your car making factory you have a lot of different types of resources you demand. You have a demand for labor, but you also have a demand for tires, steel, radios, paint, windshields and a lot more.
Let's keep our focus on the Demand for Labor. NOTHING has changed with our labor. However, there is suddenly a shortage of steel. You can only get half the amount of steel you want. How does that affect labor? Obviously you now need less laborers.
b) Technological Advances. What if another resource you used was a painting machine that painted your new cars. Let's call it the Paintsprayer 2000. It can paint 3 cars in an hour. Then the Paintsprayer 3000 comes out. It can paint 6 cars in an hour. You can now paint twice as many cars in an hour. You can now make more cars in an hour. But in order to make more cars, you need to up production everywhere else in the factory. You now need more laborers.
The increase in productivity of Resource A (Paint sprayer) has caused an increase in the Demand of Resource B (Labor).
c) Quality of the Variable Resource. This one is very similar to the last one. We again have a resource getting better, but in this case the increase in the goodness of the resource means we also want to have more of the resource. To use a different example, if we send our workers off to get trained in the latest car making techniques, they can make more cars per hour. Thus we want more workers. We have an increase in the demand for Labor. An increase in the productivity of Resource A (labor) causes an increase in the Demand for Resource A (labor)
3) The third set of determinants is changes in the Price of Other Resources. This should sound a lot like a determinant of demand in the Product Market (the Price of Other Goods). But in this case we have a change in the price of Resource A changing our demand for Resource B.
Just like with the Price of Other Goods, there are two subcategories: Compliments and Substitutes.
Compliments work exactly as you would suppose.
If something happens to make you want more of Complimentary Good A, you are also going to want more of Complimentary Good B.
If something happens to make you want less of Complimentary Good A, you are also going to want less of Complimentary Good B.
If you can easily get more steel, you need more workers to make cars out of that steel.
If you don't want as much steel, you need less workers to make cars because you have less steel.
The final bit is Substitute Resources. This is the tricky one. As such we are going to learn it later.
So that's it for today!
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