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# What does it mean to say that the demand for resources is a derived

What does it mean to say that the demand for resources is a derived demand? Is the demand for all goods and services derived demand? HERE IS A EXAMPLE JUST TO GET THE CONCEPT. (1) MRP = MPx MR. A numerical example may help clarify the idea involved here.Suppose a firm in the garbage-pick-up industry has a fleet oftrucks and must pay workers \$10.00 per hour. If the firm receives\$1.00 for each pickup, and adding another worker will allow it tomake 12 more pickups per hour, is it worthwhile to add anotherworker? Using the rule discussed above, one sees that the extravalue to the firm is 12 x \$1.00 or \$12.00. The extra cost to thefirm of hiring another worker is \$10.00. Hence, it is in theinterests of the firm to add the extra worker. After this worker isadded, the firm may find that adding another worker will add onlynine extra pickups an hour. In this case an extra worker is notworth adding because to buy an extra \$9.00 of income costs\$10.00. The marginal revenue product of a resource is in fact the firmâ€™sdemand curve for the resource. Since the law of diminishing returnssays that the marginal product of a resource should decline as moreand more of the resource is used, (which can justify the drop ingarbage pickups from 12 to 9 in the previous paragraph), the demandcurve should slope downward to the right. Such a demand curve isshownâ€¦ w. The profit-maximizing amount or labor to hire in thisFigure is q* . Suppose that for some reason people become less willing to buythe product that the firm is producing. This will affect the demandfor resources because this demand is derived fromthe demand for output. In terms of equation 1, the drop in thedemand for the product affects the marginal revenue of output. Thismeans that even though the resource is as productive as it wasbefore, it now brings less value to the firm because the output itproduces is less valuable. In terms of the graph, the drop inmarginal revenue of output shifts the demand for the resource tothe left. If the wage does not change, the new equilibrium level ofresources hired will be q1 in the graph below, andthis will be achieved by laying-off or firing q1-q* of the resources.