c Explain the determinants of resource demand i Discuss the

c. Explain the determinants of resource demand. i. Discuss the 3 determinants of resource demand 1. Changes in product demand 2. Changes in productivity a. Quantities of other resources b. Technological advance c. Quality of the variable resources 3. Changes in the prices of other resources including: a. The case of substitute resources – the substitution effect and the output effect b. The case of compliments

Solution

Ans

Greater the demand for a product greater the demand for productive resources used in its production. Small the final demand smaller the demand for resources

B greater the quantity of other resources used with variable factor greater the productivity and thus greater the demand for resources. But this should is true only upto optimal resource mix is established. After that negative returns set in and smaller the demand for resources. Greater the technology advance and quality of resources greater the productivity and greater the demand for resources. However some technology advance reduce resource use and thus in this case demand for resource will fall. A decrease in price of substitute resources will have substitution and output effect. If output effect is greater than substitution effect, demand for resource will rise. Otherwise it will fall. Greater the price of compliments smaller the demand for resources.