3. The demand for resources a. You are an Economics teacher. Please explain to y

Question

3.   The demand for resources
a.   You are an Economics teacher. Please explain to your class the significance of resource pricing on resource allocation among:
i.   Firms and industries,
ii. The determination of income,
iii. Include the impacts on the ability of a firm to achieve cost minimization.
1.   Discuss how resource prices affect the ability of firms in an industry relative to their ability to acquire resources and the subsequent impact on output,
2.   Discuss the impact of resource prices on the determination of income that results from the sale of those resources.
3.   Discuss the impact of resources prices on the ability of firms to minimize costs.

b.   Explain to the class the marginal productivity theory of resource demand and why businesses care about it.
i.   State the assumptions
ii. Explain MRP and MRC, and the firms’ rule for employing resources
iii. Be sure to explain the terms and what they mean to a business.

c.   The determinants of resource demand.
i.   Discuss the 3 determinants of resource demand
1.   Changes in product demand
2.   Changes in productivity
a.   Quantities of other resources b.   Technological advance
c.   Quality of the variable resources
3.   Changes in the prices of other resources including:
a.   The case of substitute resources – the substitution effect and the output effect
b.   The case of compliments

Explanation / Answer

3. Resource pricing plays an important role in pricing decision of the firms and industires. Resource allocation is a very important aspect in determining the prices of the output ans the cost decisions of a firm/industry. Firms/industry employ different resources to meet their production needs and in return pay them their prices. Higher prices paid implies higher is the cost of production and to cover that higher cost, the firms would charge a higher price for their products. Thus cost minimisation here palys a vital role in determining the efficient output that results in least cost combination of resources. The efficient allocation of resources over time calls for continuing shift of resources from one use to another.

Resource prices is not only useful with firms/industries, but also in determing the income level of the households. Higher (lower) cost of production implies lower (higher) profits levels and hence lower (higher) incomes of the households. Expenditure that firms make to acquire resources flow as wage, rent, interest, profits, to households that supply.

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