AP Micro Unit Five: The Factor Market Vocabulary

derived demand

The demand for a resource that depends on the demand for the products it helps to produce.

marginal product

The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.

marginal revenue product (MRP)

The change in a firm's total revenue when it employs 1 additional unit of a resource (the quantity of all other resources employed remaining constant); equal to the change in total revenue divided by the change in the quantity of the resource employed.

marginal resource cost (MRC)

The amount the total cost of employing a resource increases when a firm employs 1 additional unit of the resource (the quantity of all other resources employed remaining constant); equal to the change in the total cost of the resource divided by the change in the quantity of the resource employed.

MRP= MRC rule

The principle that to maximize profit (or minimize losses), a firm should employ the quantity of a resource at which its marginal revenue product (MRP) is equal to its marginal resource cost (MRC), the latter being the wage rate in pure competition.

substitution effect

1) A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the product's price; (2) the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.

output effect

The situation in which an increase in the price of one input will increase a firm's production costs and reduce its level of output, thus reducing the demand for other inputs; conversely for a decrease in the price of the input.

elasticity of resource demand

A measure of the responsiveness of firms to a change in the price of a particular resource they employ or use; the percentage change in the quantity of the resource demanded divided by the percentage change in its price.

least-cost combination of resources

The quantity of each resource a firm must employ in order to produce a particular output at the lowest total cost; the combination at which the ratio of the marginal product of a resource to its marginal resource cost (to its price if the resource is employed in a competitive market) is the same for the last dollar spent on each of the resources employed.

profit-maximizing combination of resources

The quantity of each resource a firm must employ to maximize its profit or minimize its loss; the combination in which the marginal revenue product of each resource is equal to its marginal resource cost (to its price if the resource is employed in a competitive market).

marginal productivity theory of income distribution

The contention that the distribution of income is equitable when each unit of each resource receives a money payment equal to its marginal contribution to the firm's revenue (its marginal revenue product).

wage rate

The income of those who supply the economy with labor.

nominal wage

The amount of money received by a worker per unit of time (hour, day, etc.); money wage.

real wage

The amount of goods and services a worker can purchase with his or her nominal wage; the purchasing power of the nominal wage.

purely competitive labor market

A resource market in which many firms compete with one another in hiring a specific kind of labor, numerous equally qualified workers supply that labor, and no one controls the market wage rate.

monopsony

A market structure in which there is only a single buyer of a good, service, or resource.

occupational licensure

The laws of state or local governments that require that a worker satisfy certain specified requirements and obtain a license from a licensing board before engaging in a particular occupation.

bilateral monopoly

A market in which there is a single seller (monopoly) and a single buyer (monopsony).

minimum wage

The lowest wage that employers may legally pay for an hour of work.

wage differential

The difference between the wage received by one worker or group of workers and that received by another worker or group of workers.

marginal revenue product (MRP)

The change in a firm's total revenue when it employs 1 additional unit of a resource (the quantity of all other resources employed remaining constant); equal to the change in total revenue divided by the change in the quantity of the resource employed.

noncompeting groups

Collections of workers in the economy who do not compete with each other for employment because the skill and training of the workers in one group are substantially different from those of the workers in other groups.

compensating differences

Differences in the wages received by workers in different jobs to compensate for nonmonetary differences in the jobs.

human capital

The knowledge and skills that make a person productive.

economic rent

The price paid for the use of land and other natural resources, the supply of which is fixed (perfectly inelastic).