Assignment:
Marginal Revenue Product
Marginal revenue product is defined as the change in total revenue that results from the employment of an additional unit of a resource. A producer wishes to determine how the addition of pounds of plastic will affect its MRP and profits. See the table below, and answer each of the questions.
|
Pounds of plastic (quantity of resource)
|
Number of assemblies (total product)
|
Price of assemblies ($)
|
|
0
|
0
|
-
|
|
1
|
15
|
13
|
|
2
|
30
|
11
|
|
3
|
40
|
9
|
|
4
|
55
|
7
|
|
5
|
58
|
5
|
a. The marginal product of the 3rd pound of plastic is ________.
b. The marginal revenue product of the 3rd pound of plastic is ______.
c. The price of plastic is $135 per pound. To maximize profit, the producer should produce __________________.
d. The price of plastic is $135 per pound. To maximize profit, the producer should buy and use: ________________.Circular Flow of Economic Activity
Using the Circular Flow of Economic Activity model, we can determine how an economic system works to allocate scarce resources. Households, who own factors of productive resources like land, labor, and capital, are used by firms to produce goods and services which households need and desire.
For the use of the factor resources, firms pay households income, wages, rent, and interest, which households use to purchase those goods and services.
But how do households and firms in resource markets determine the proper allocation and price for those productive resources?
Demand for resources is derived demand. Demand is derived according to the demand for the end product. The demand curve (demand for a productive resource) will be downward sloping and negatively sloped. A change in demand for the end product will lead to a change in demand for a productive resource.
With respect to the price elasticity of demand for a productive resource, the greater the number of substitutes and complements, the higher the price elasticity will be for the productive resource. Thus, the slope will be lower when the demand for a productive resource is more price elastic.
Firms use productive resources to produce goods and services.
Output is the result of using productive resources. In economics, we differentiate and define output according to the following:
Total Product (TP): Total output produced from an input resource.
Average Product (AP): Average output produced per input resources. AP = TP / (# of units of input)
Marginal Product (MP): Change in total product when one more unit of input resources is used. MP = (change in TP) / (change in units of input)
Margin Revenue Product (MRP): Change in total revenue when one more unit of input resources is used. MRP = (change in TR) / (change in units of input)
Value Marginal Product (VMP): Value of the marginal product of labor the next unit of input resource brings to the firm. VMP = MP X selling price
In product markets, we know that firms - all firms - produce optimal output at the point where marginal revenues equal marginal costs. But in productive resource markets, at what point will a firm find equilibrium and optimal marginal resourcing?
Marginal revenue product (MRP) equals marginal resource cost (MRC), or MRP=MRC. In aggregate resource markets, demand for labor and supply of labor converge to an equilibrium point for price and quantity. For individual firms, the demand for labor (MRP) will be a downward-sloping curve, indicating that as quantity demanded for a resource rises when the price of labor falls. The MRC will entail how much a firm pays to secure one more unit of a productive resource.
Labor Curve
What causes a differential between the wages of one type of job versus another?
• Between skilled and non-skilled?
• Can price floors or minimum wages be instituted to benefit low-wage earners to lift them up and reduce poverty?
• Are there negative effects of minimum wages?
• How technology play a part in all of this?
When we analyze how productive resource markets operate, we are more equipped to answer those questions.
• For example, individuals are different, and they have different sets of skills and motivations.
• Jobs are different and are not all the same.
• Higher paying jobs tend to require higher productive and skilled individuals.
• There is a separate demand for labor skilled curve and demand for labor unskilled curve; there is a separate supply of labor skilled curve, as well as a separate unskilled labor supply curve.
The demand for labor skilled curve and demand for labor unskilled curve are parallel, with the demand for labor skilled farther rightward than unskilled.
As for the supply side, the supply of labor skilled curve and supply of labor unskilled curve are also parallel, with the supply of labor skilled farther leftward than unskilled.
How do we read that, and what are the implications? When you put the four curves together, what is ascertained is the gap between the demand curves is the marginal product difference, or the additional total product attained by adding one more unit of skilled labor; the gap between the supply curves indicates skilled labor is more costly and is less plentiful as unskilled.
Ultimately, what is ascertained about the price of labor is the gap between the equilibrium points of the demand for labor unskilled and supply of labor unskilled versus the equilibrium points of the demand for labor skilled and supply of labor skilled is the wage difference (or otherwise known as the "wage gap").
Can this wage gap be closed a bit to offer better pay conditions for a low-wage earner? What, if any, are the negative aspects of a minimum wage?
A minimum wage, which is a price floor set by firms or government, is the price that is the least a firm can pay for use of a labor resource.
The price is set above the equilibrium price where the demand for labor and supply of labor meet.
The Law of demand and Law of supply come into play. At the higher price, quantity demanded is less, while quantity supplied is higher. Since quantity demanded is less than quantity supplied, surpluses ensue. More productive resources are available to be hired, while fewer buyers of productive resources exist. Increases in unemployment can occur from this imposed price floor.
Can technology actually lead to higher productivity and even wider gaps between skilled and unskilled. Yes for both. The aggregate production function curve represents how productivity depends upon the physical capital per worker, human capital per worker, and relative technology.
• As newer and better technology is used, productive resources tend to achieve exponentially higher productive levels relative to older and less advanced technology.
As workers who achieve higher levels of skill and utilize technology to increase efficiency and productivity increase when unskilled workers do not, the wage gap and demand for supply of unskilled labor widens.