AP Microeconomics Unit 5: Factor Markets-Test

What are the four factors of production?

land, labor, capital, entrepreneurship

What are factor prices (factor payments)?

Payments made for the use of the factors of production

Examples of factor prices (factor payments)

Land is paid in rent, Labor is paid in wage, Capital is paid in interest, Entrepreneurs are paid profit

In the _____________ market, individuals pay businesses for goods and services.

product

In the _____________ market, businesses pay individuals for the use of resources.

factor

What is demand for labor?

Demand is the different quantities of workers that businesses are willing and able to hire at different wages.

There is an _____________ relationship between wage and quantity of labor demanded.

inverse

What is supply for labor?

Supply is the different quantities of individuals that are willing and able to sell their labor at different wages.

There is a ____________________ relationship between wage and quantity of labor supplied.

direct (or positive)

Who demands labor?

firms

As wage falls, quantity demanded...

increases

As wage increases, quantity demanded...

decreases

Who supplies labor?

individuals

As wage increases, quantity supplied...

increases

As wage decreases, quantity supplied...

decreases

minimum wage

a minimum amount employers are allowed to pay their workers

Marginal Resource Cost (MRC)

the additional cost of an additional resource (worker)

MRC= change in total cost/change in inputs

Marginal Revenue Product (MRP)

the additional revenue generated by an additional worker

MRP= change in total revenue/change in inputs

What are other reasons for differences in wages?

insufficient/misleading job information, geographical immobility, unions, wage discrimination

What shifts the demand for labor?

1. Price of output

2. Productivity of worker

3. Change in the price of other resources

derived demand

the demand for resources is derived (determined) by the products they produce

What shifts the supply of labor?

1. Education and training

2. Availability of alternative options

3. Immigration and mobility of workers

4. Cultural expectations

5. Working conditions

6. Preferences for leisure

economic rent

a payment above the minimum needed to cause a resource to be put into production (if labor is the resource, it is anything above the worker's opportunity cost)

characteristics of a perfectly competitive labor market

- many small firms are hiring workers

- no one firm is large enough to manipulate the market

- many workers with identical skills

- wage is constant

- workers are wage taker

How do you know how many resources (workers) to employ?

continue to hire until MRP=MRC

Least Cost Rule

the least cost combination occurs when a firm adjusts their employment of resources to minimize cost

MPx/Px = MPy/Py

Profit Maximizing Rule for Combining Resources

MRPx/MRCx = MRPy/MRCy = 1

characteristics of an imperfectly competitive labor market (monopsony)

- one firm hiring workers

- the firm is large enough to manipulate the market

- workers are relatively immobile

- firm is wage maker

- to hire additional workers the firm must increase the wage

examples of monopsonies

Central American Sweatshops, Midwest small town with a large car factory, NCAA

For monopsonies, MRC does not equal...

supply