AP MICRO: Factor Markets

what are the factors of production?

• Land

• Labor

• Capital (physical and human)

• entrepreurship

what do firms use to decide how many resources to employ?

marginal analysis

what is MPL?

Marginal Product of Labor, which measures the additional output produced when one more unit of labor is employed.

what is VMPL?

• value of marginal product of labor

• FORMULA: VMPL = P x MPL

how do firms determine the profit maximizing employement?

• Firms hire workers until VMPL = Wage rate (W)

• VMPL > W → hire more workers (increases profit)

• VMPL < W → don’t hire more (decreases profit)

what represents the firm’s demand curve for labor?

the VMPL curve (value of the marginal product curve)

what is derived demand?

the demand for labor is dericed from the demand for goods and services that labor helps produce.

deminishing marginal returns in the context of labor

each additioinal worker contributes less to total output because other inputs (like capital or land) are fixed

labor supply curve

• upward sloping: higher wages attract more workers

equilbrium wage and employment

• labor demand = labor supply