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