Significance of resource pricing and factors determining the resource demand which is different from the factors that determine product demand.
Explanation of Solution
Households own the scarce resources which is their source of income. The resource pricing determines the income of households as firms acquire economic resources and pay as wage, rent, interest and profit to the household for the supply of resources. Resource pricing are the costs for the firm. Firms always desire to minimize the cost and maximize the profit. This in turn, would encourage the firms to efficiently use the scarce resource. Resource pricing helps in determining the allocation of resources in industries and firms.
The demand for products is determined by the income and tastes, whereas the demand for resources is passive based on demand of product that requires particular resources. The demand of resources depends on the demand of product. Unlike product, resources are less mobile. The demand of product is determined by geographic availability of resources. Thus, resources that demand geographically vary affecting the demand of products.
Since the demand for resources depends on the demand for goods and services, it is a derived demand. If there is no demand for goods, then there will no demand for resource too. Also, the demand for resource is determined by the productivity and its price.
If the resource price is low, then the cost of production will be low causing to increase the demand for resources and vice versa. Thus, the demand curve for resource slopes in the downward direction due to the law of diminishing returns.
Concept introduction:
Resource pricing: Resource price refers to the pricing of natural and scarce resource for the optimum use.
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Microeconomics: Principles, Problems, & Policies (McGraw-Hill Series in Economics)
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