Markets for Resources

In the chapter on Supply and Demand we limited our attention to the supply and demand for consumer goods, to keep things a little simpler. In this chapter we extend the supply and demand approach to cover markets for resources, or, in the economist's traditional jargon, factors of production. We will discuss markets for

People demand consumer goods for the direct benefits of consuming them. That's not true of labor, land and capital. These factors of production are demanded in order to use them in producing consumer goods. In other words, the demand for factors of production is a "derived demand" -- that is, it is derived from the demand for the consumer goods. When a firm demands resources in order to produce potatos (for example) the firm's demand for resources will depend on two things: the demand for potatos, and the productivity of the resources in producing potatos. To be more precise -- drawing on ideas from Chapter 6 -- it will depend on the market price of potatos and on the marginal productivity of the resources in producing potatos.

We will take up where we left off in Chapter 6, with the demand for the human resource: labor.