Economics Study Set 18
Quiz 25 :
The Supply of and Demand for Productive Resources
Derived demand is a concept wherein the demand for a good is dependent on the demand of other related goods. For e.g. it can be said that natural resources like sand don't have any demand for themselves however if we convert sand into bricks or something into any useful product, then demand for it increases. This is known as derived demand. Employment of resource is inversely related to price as when the price of resources falls, more resources are produced in market and as a result of that more labor is employed in order to produce more output which increases labor employment. Similarly when price of a resource rises, its demand falls, which reduces demand of that product in market and due to that labor employed reduces. Thus it can be said that there is an inverse relation between demand for a resource and employment of a resource.
An additional resource is employed when a firm thinks that its demand would increase in future. Other thing which firms should take into account is the opportunity cost of using additional resource. If the firm is a manufacturing unit then unskilled or semi-skilled labor is required by it, but if we talk of service industry, then only the skilled labor is required in order to match the industry's expertise. However, if a firm is both manufacturing and service oriented, then both skilled and unskilled labor is required by it in order to work and produce effectively.
There is a direct relationship between productivity and wage rates. An improvement in production process increases the supply which increases revenue and as a result of that wages of employees also increases. So, with a rise in production, wages also increase. Talking of barbers who use the same technology and technique, a high wage rate in the market will increase the opportunity cost to barbers and would thus lead to a fall in their supply. A fall in supply would then put an upward pressure on the wage rates of the barbers. This happens even if there is no change in the technology or productivity of barbers.