## Exploring The Supply Curves of Resources, And Other Fun Topics

One of the three fundamental tasks of a firm is to hire or buy inputs, and this part of the business is shown in economics with supply curves for resources. The table below shows two supply curves that represent two different markets of resources. In which of these markets is the firm a price taker? Market for Labor
In which is it a price searcher? Market for Machines
Marginal resource cost is the cost of adding another unit of resource. In the two tables below, fill in the marginal-resource-cost columns. (If you have problems, try to first compute the total cost, and from that get marginal resource cost.)

 Market for Labor Market for Machines Wage Amount of Labor Supplied Marginal Resource Cost Price Amount of Capital Supplied Marginal Resource Cost \$10 1 \$10 \$10 1 \$10 \$10 2 \$10 \$11 2 \$12 \$10 3 \$10 \$12 3 \$14 \$10 4 \$10 \$13 4 \$16 \$10 5 \$10 \$14 5 \$18

A supply curve is a boundary that limits buyers. What will the supply curve for labor shown above look like if we draw it? A horizontal line The region in which the firm is allowed by this supply curve is the area above/to the left of the supply curve.
With the first supply curve above, where price and hence average resource cost is constant, marginal resource cost is equal to price. In the second supply curve, where price is rising and hence average resource cost is rising, marginal resource cost is greater than price.
What should matter to the firm when it decides how much of a resource to buy, the price or the marginal resource cost? marginal resource cost
The supply curve that a monopsonist faces is similar to the second supply curve above.
Suppose the firm facing the second supply curve can buy the first at \$10, then buy another for \$11.00 but still keep buying the first at \$10, etc. This pattern of pricing is a form of price discrimination. What would the marginal resource cost of the fourth unit of capital be in this case? \$13

Some introductory courses in economics explain income and substitution effects, and other introductory courses leave them for more advanced courses. Here are a few questions that should let you know what is involved in them, and why they can sometimes be important.

a) Suppose that the price of automobiles rises. As a result, you can afford to buy less goods, and this income effect encourages you to buy less car services. The substitution or incentive effect decreases the attractiveness of buying cars relative to other goods and services. Hence, what can we predict? People will buy fewer cars.
b) Suppose wages rise. As a result, people will be able to afford more goods and services, and thus the income effect encourages them to buy more leisure, which means they want to work less. This is the income effect. The substitution or incentive effect says that the attractiveness of earning money relative to other uses of time has increased. Hence, what can we predict? We cannot be sure what they will do.
c) Suppose interest rates rise. As a result, the possible consumption patterns over our lifetime are higher and this income effect should cause people to consumer more and save less. The substitution or incentive effect notes that consuming in the future is more attractive to consuming in the present, and this should cause saving to increase. Hence, what can we predict? We cannot be sure what they will do.
d) Suppose rents fall. As a result, you can afford more goods and services including housing, and this income effect encourages you to buy more housing. The substitution or incentive effect increases the attractiveness of housing relative to other goods and services. Hence, what can we predict? People will rent more housing.

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