Micro 5.1 & 5.2 - Introduction to Factor Markets

Introduction to Factor Markets

Definition: Platforms where buyers (businesses) and sellers (households) trade resources for production.

Comparison to Product Markets: Focus on factors of production rather than goods and services.

Key Economic Players

• Demanders: Businesses needing resources (labor, land, capital).

• Suppliers: Households providing these resources.

Types of Productive Resources

1. Land - Payment: Rent

2. Labor - Payment: Wages

3. Physical Capital - Payment: Interest (often from loans)

Focus on Labor Markets

• Primary focus in AP Microeconomics due to its production importance.

• Marginal Product: Additional output from adding one worker; can become negative due to inefficiencies.

Marginal Cost of Labor

• Inversely related to marginal product; higher wages can result in lower marginal product.

Demand for Labor

• Marginal Revenue Product of Labor (MRP): MRP = marginal product × marginal revenue; firms hire until MRP equals wages.

• Demand curve is downward sloping due to the wage-worker quantity relationship.

Derived Demand

• Resource demand is influenced by final product demand (e.g., housing demand increases labor demand for carpenters).

Supply of Labor

• Upward-sloping supply curve; higher wages attract more workers.

Economic Rent

• Extra compensation above the minimum needed for production (e.g., teacher's opportunity cost).

Equilibrium in Labor Markets

• Equilibrium wage and employment are at the intersection of demand and supply; no unemployment at equilibrium.

Impact of Minimum Wage

• Price floor above equilibrium leads to labor surplus (unemployment).

Market Shifts and Changes

• Factors like increased product price or automation can shift demand and supply, affecting wages and employment.

Conclusion

• Understanding factor markets is essential for grasping labor dynamics in an economy.