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Demand: Utility and Marginality

1. The demand for factors of production or resources is called a derived demand. Explain the reasoning behind this terminology. What are the determinants that lie behind the demand for factors?

2. Suppose you were the economic adviser to the president of a small underdeveloped country. What advice would you give him or her with respect to how the country could raise the productivity of its labor force? (Hint: What factors increase labor productivity?)

3. Explain how changes in technology affect and change the demand for labor. Distinguish between situations in which a particular type of technological change increases the demand for a particular type of labor and those in which it decreases the demand for a particular type of labor.

4. Given the evidence cited in the Case in Point in Chapter 12 on the increasing wage gap between workers with college degrees and those who have only completed high school, how has the greater use by firms of high-tech capital affected the marginal products of workers with college degrees? How has it affected their marginal revenue product?

Resources:

Rittenberg Libby and T. Tregarthen. (2009). Chapter 12: Wages and Employment in Perfect Competition. Sections 1-4. FlatworldKnowledge.com.

http://www.cato-at-liberty.org/reporting-the-minimum-wage/

http://www.epi.org/publication/issue_guide_on_minimum_wage/

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1. The demand for factors of production or resources is called a derived demand. Explain the reasoning behind this terminology. What are the determinants that lie behind the demand for factors?

The reasoning here is very simple. A demand for something is "derived" from something else when the demand for good a is connected with factors that go into producing it. Aluminum is made from bauxite. Hence, any demand for aluminum products will, all other things being equal, equate with an increasing demand on the world's bauxite reserves.

Factors of production too, is a simple concept. These are the fundamental "raw materials" that go into the production of any good. The simplest concepts here are land, labor, capital, and on occasion, things like innovation, entrepreneurship and "human capital".

Derived demand connects these two. Derived demand is the demand on a factor of production when the goods these factors help create are demanded. Keeping it basic, the demand for factors is dependent upon the demand for the product created by the factors, other factors (if one factor is needed for production and this factor goes up in demand, other factors in that same production process will go up too), prices for other factors (things needed for production might shift in price differently from one another. How this shift moves can help determine demand), and finally, the value of the end product. As this value increases, the demand price of the factors will increase as well.

2. Suppose you were the economic adviser to the president of a small underdeveloped country. What advice would you give him or her with respect to how the country could raise the productivity of its labor force? (Hint: What factors increase labor productivity?)

We could say the following. Any country that wants to ...

Solution Summary

The demand for utility and marginality is examined.

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