Economics

Business

Quiz 11 :
Market Structures I

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Quiz 11 :
Market Structures I

Derived demand: Derived demand refers to the demand for goods and services that arise due to the demand for other goods and services. Marginal cost: Marginal cost refers to the additional cost made to the total cost in producing one more unit of good.Marginal revenue: Marginal revenue refers to the additional revenue made to the total revenue by selling one more unit of good.a.Demand for labor: Labor size is determined by firms. The goal of the firm is to maximize the profit. To maximize profit, firms will increase the labor size till the marginal revenue from the last labor exceeds the marginal cost of employing the labor. b.Supply of labor: Labors belong to household sector. Hence, the supply of labor is determined by the households. The goal of the household is to maximize the utility. To increase the utility, households would increase the labor supply till the net utility increases. c.Derived demand of labor: The demand for labor arises when there is a demand for goods and services. If there is no demand for goods and services, then there is no demand for labor. Hence, the demand for labor is a derived demand.

Derived demand is a term used to describe the demand for a good because of what that good produces. For example, an orange juice producer would demand oranges for the good it produces - orange juice. This concept applies to lumber as well. Lumber is demanded because it is used to build structures, including houses. With this in mind, it is easy to see the relationship between the demand for housing and the demand for lumber. As the United States economy bounced back from a 2001 recession, housing demand increased. In just three years, the price of lumber per thousand board feet rose from $281 to $473. However, starting in 2005 and lasting until 2009, the housing market began to decline. The price for the same amount of lumber dropped down to a low of $140. Thus, it is clear that the demand for lumber is very closely related to the demand for housing, and is therefore a derived demand.

Upward slope of market supply: Market supply curve for resources is upward because if the price of resources is increasing while other things remain constant, then the value of one unit of resource will also increase. Now, people can earn more income by supplying the resources. Therefore, people would supply those resources which generates less revenue and unutilized. Hence, the supply of resources increases due to increase in the price of resources.

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