Elasticity of Resource Demand refers to the relative change of resource demand caused by changes in resource price.

Erd= (percentage change in resource quantity) / (percentage change in resource price)

* Elasticity of Resource Demand 3 main determinants:

• Ease of Resource Substitutability

High # of substitutes = ELASTIC resource demand
Low # or no substitutes = INELASTIC resource demand
TIME: more time, more elastic

• Elasticity of Product Demand
  

DERIVED resource elasticity from product
High product elasticity = high resource elasticity
Low product elasticity = low resource elasticity

• Ratio of Resource Cost to Total Cost

Large proportion of total cost = High elasticity
Small proportion of total cost = Low elasticity

Optimal Combination of Resources:
Least-Cost Rule:

• Marginal Product of labor/Price of Labor = Marginal Porduct of capital/Price of capital. More simply: MP(L) / P(L) = MP(C) / P(L).

• A firm produces using this rule when the last dollar spent on each resource yields the same marginal product.
• If the equation is not balanced, the firm should produce more (either capital or labor) of the larger number, so that the equation becomes true.

Profit Maximizing Rule:

• Marginal Revenue Product of Labor/Price of Labor = Marginal Revenue Product of Capital/Price of Captial = 1. Simplified: MRP(L) / P(L) = MRP(C) / P(C) = 1.
• Minimizing cost does not necessarily maximize profit, but maximizing profit always minimizes costs.