AP Economics UNIT 5: FACTOR MARKETS

Physical Capital

Consists of manufactured productive resources such as equipment, buildings, tools and machines

FOUR MAIN CATEGORIES
LABOR
LAND
CAPITAL
ENTRERPRENEURSHIP

Human Capital

improvement in labor created by education and knowledge embodied in the workforce

Derived Demand

The demand of a factor it results or is derived from the output being produced

Factor Distribution of Income

Division of total income among land, labor, capital, and entrepreneurship

WHERE IS IT GOING?

changes depending on the economy

E.G. industrial revolution increased portion put into factories, decreased portion put into farmers

Employment compensation

return on human capital/experience

E.G high payment/salary for doctors

Marginal Productivity

The amount of product gained with the next worker

Why does Marginal Product go down?

Law of diminishing returns

IT IS ALSO KNOWN AS Marginal Product of Labor

DOWNWARD SLOPING

In factor markets, firms buy ______ and households sell _______

inputs, inputs

Marginal Revenue Product of Labor

ALSO KNOWN AS MRP

the additional revenue generated by employing one more unit of that factor

FORMULA: MP/MPL * P

Firms continue to hire more workers until the ———- equals the —————-

MRPL/MRP, wage rate

Shifts of the Factor Demand Curve

THREE CAUSES

Changes in price of goods (P increases, MPR increases)
Changes in supply of other factors

Changes in technology

Rental Rate

the cost, explicit/implicit, of using a unit of that assets for a given period of time → mostly applies to land and capital

Equilibrium Marginal Revenue Product

The additional revenue generated by the last unit of that factor employed in the factor market as a whole

**Look at it the same as price, all inputs are paid the equilibrium marginal revenue in that market

Economic Rent

payment to a factor of production in excess of the minimum payment necessary to employ that factor

Increasing Q of productive land, High costs, finite determines inelasticity

What is this even saying?

Marginal Productivity Theory

Every factor of production is paid the equilibrium marginal revenue product

E.G. wage rate earned by chefs = MRP (of the last pastry chef)

Time Allocation

how many hours to spend on different activities

Leisure

free time of the 24 hours/everything that time available for purposes is NOT other than earning money to buy goods/work

Substitution Effect

At a higher wage, work becomes more valuable than leisure, so workers work more

Income Effect

at a higher wage, leisure is more affordable, so workers work less

hours dependent on wage

Individual Labor Supply Curve

→ demonstrates how Q of labor supplied by an individual depends on that individual’s wage rate

Top half: Income

Bottom half: Substitution

Shifts of Labor Supply Curve

4 CHANGES

• Changes in preferences/social norms E.G. women in workforce

• Changes in population E.G. population growth

• Changes in opportunities E.G. opportunities of women in STEM

• Changes in wealth E.G wealth increasing, working less

Perfect Competition

paid more + higher more workers

MANY SMALL FIRMS

Imperfect Competition

hire fewer workers + pay less

RUN BY A MONOPSONIST

Marginal Factor Costs

The additional costs of employing the next unit of a factor of a product

Monopsonist

A single buyer of a factor/ all workers work for one person→ have to pay all workers fair + increas pay of preexisting workers

MFC

change in total labor costs per each hired worker

For Imperfect Competition + Perfect competition

Firms should hire until MRP = MFC

To get perfect competition off of a imperfect competition graph, wait until…

S=D

Firm’s profit from MRP graph

output price - (marginal factor cost * workers) OR total wage paid to workers

How to determine if perfect competition or imperfect competition

MFC constant → perfect

MFC changing → imperfect

You hire for MPR = WAGE RATE until the number is

hit, NOT AFTER

Rental rate is difference between

two demand curves

THE WHOLE CHUNK IS PROFIT THAT GOES TO THE PERSON RENTING IT OUT

increased productivity

MORE WORKERS HIRED, MORE PROFIT + PRODUCT BROUGHT IN

Wage isnt constant in imperfect competition

to balance keeping wages low and attract workers in to create a single hiring agent