AP Microeconomics Unit 5: Factor Markets

What is the difference between factor and product markets?

Factor Market: Firms Pay Individuals

Product Market: Individuals Pay Firms

Why is the Demand for Labor downward sloping?

The number of workers that businesses are willing and able to hire increases as the wage falls.

Why is the Supply of labor upward-sloping?

The number of workers that are willing and able to sell their labor increases as the wage increases.

What happens to the market wage and quantity if there is a binding minimum wage?

Wage increases and quantity of workers decreases

What increases if minimum wage is raised too much?

Unemployment

Define MRC

The additional cost of hiring one additional worker

Define MRP

The additional revenue generated by one additional worker

What is MRC equal to?

Wage

How do you calculate MRP?

MP * P

What are the shifts in demand for labor?

1. Changes in the price of output: If the price increases, the worker that produces the product becomes more valuable

2. Derived Demand

3. Productivity of worker

4. Changes in the price of subs/complements

   1. If the price of a subsitute resource goes up the demand increases

   2. If the price of complement resource goes up then the demand decreases

What are the shifts in supply of labor

1. working conditions

2. government regulations

3. immigrating and mobility of workers

4. cultural expectations

Workers in a PCM work for the same ____ which is set by the ____

wage, market

Characteristics of a PCM

1. many small firms hiring

2. identical labor

3. wage is constant

4. wage takers

Profit Maximization Rule

MRC = MRP

Least Cost Rule

MPx/Px = MPy/Py

profit maximizing rule for combining resources

MRPx/MRCx = MRPy/MRXy = 1

You want more of the ____, and less of the _____

greater value, lower value

The supply of labor for firms in perfect competition is perfectly ____

Elastic

If the government sets a binding min. wage, will the MRP of the last worker hired increase, decrease, or stay the same?

MRP will increase because firms will get more selective with who they are hiring due to a higher wage. Those with a higher MRP will be the ones still in employment.

Characteristics of a Monopsonisitc Market

1. One large firm hiring

2. Wage is higher than supply

3. Wage makers

In a Monopsonistic Market, does the MRC =Wage?

No

In a Monopsonistic Market, does the MRC =supply?

No

Where do monopsonies hire and pay?

Hire where MRC = MRP and pay where it intercepts with the supply curve

True or False: If the demand for houses increases, the wage of carpenters will increase and quantity will decrease

False

True/False: Assume brick and wood are subs. if the price of bricks increases, the price of wood will increase.

True

True/False: A binding min. wage leads to relatively less unemployment when the demand for labor is inelastic

True

True/False: A monopsony hires less workers and pays less than a PCM

True

whats another way to write the least Cost Rule?

MPx/MRCx = MPy=MRCy

Which of the following will occur in a given labor market when the wage rate rises?

The quantity of labor supplied would increase ( a movement along the supply curve)