AP Microeconomics Unit 5
Factors of Production: land, labor, and physical capital
Payments for Factors:
Rent: payment for land
Wages: payment for labor
Interest: payment for physical capital
Shows the relationship between the quantity of labor a business hires and the amount of output those workers can produce
Three phases of the law of diminishing marginal returns:
Increasing marginal product
Decreasing marginal product (diminishing marginal returns)
Negative marginal product
MRP = Marginal Revenue ร Marginal Product
Used to determine how many workers a business would like to hire
Formula: MRP = P ร MP, where P is the price and MP is the marginal product
Definition: The quantity of labor a firm is willing and able to hire at a given wage rate
Characteristics:
Downward sloping demand curve
Inverse relationship between the wage and the number of workers hired
When the wage falls, the number of workers hired increases
Definition: The sum of each firm's marginal revenue product
Characteristics:
Downward sloping demand curve
Inverse relationship between the wage and the number of workers hired
When the wage falls, the number of workers hired increases
Definition: The quantity of labor households are willing and able to supply at a given wage rate
Characteristics:
Upward sloping supply curve
Direct relationship between the wage and the quantity supplied
When the wage rises, the quantity supplied increases
Definition: The point where the supply and demand curves intersect
Characteristics:
Determined by the interaction between supply and demand
Equilibrium wage: the wage at which the quantity supplied equals the quantity demanded
Equilibrium quantity: the quantity of labor hired at the equilibrium wage
Changes in Demand:
Increase in demand: shifts the demand curve rightward
Decrease in demand: shifts the demand curve leftward
Changes in Supply:
Increase in supply: shifts the supply curve rightward
Decrease in supply: shifts the supply curve leftward
Characteristics:
Many buyers of labor
Each individual firm is a wage-taker
The market sets the wage
Marginal Resource Cost (MRC):
The amount of money a business has to pay to hire one more worker
Equal to the market wage
Definition: The marginal revenue product curve
Characteristics:
Upward sloping portion (increasing marginal returns)
Downward sloping portion (decreasing marginal returns)
Profit-maximizing quantity: where the marginal revenue product equals the marginal resource cost
Definition: A market structure in which there is only one buyer of a resource (labor)
Characteristics:
The firm's supply curve is the labor supply curve
The firm must increase wages to hire more workers
The relationship between the wage and the marginal resource cost is different from that in a perfectly competitive market## Monopsony in Labor Markets ๐
The marginal resource cost is the change in the total resource cost.
In a monopsony, the marginal resource cost is greater than the wage.
The supply of labor is upward sloping, represented by the market supply curve.
The marginal resource cost curve is above the supply curve.
The firm's demand curve is the marginal revenue product.
The profit-maximizing quantity of labor is where the marginal revenue product equals the marginal resource cost.
In a perfectly competitive market, the equilibrium wage is where the supply and demand curves intersect.
The equilibrium quantity of labor is where the supply and demand curves intersect.
A monopsony pays lower wages and hires fewer workers than a perfectly competitive market.
Monopsonies are not allocatively efficient.
There is deadweight loss in a monopsony.
Take the marginal product of each resource and divide it by the price of the resource.
The profit-maximizing combination is found where the marginal product of labor divided by the price of labor equals the marginal product of capital divided by the price of capital.
Resource | Marginal Product | Price | Marginal Product per Dollar |
---|---|---|---|
Labor | 30 | 15 | 2 |
Capital | 100 | 25 | 4 |
In this example, the firm should employ more capital and less labor.
Factors of Production: land, labor, and physical capital
Payments for Factors:
Rent: payment for land
Wages: payment for labor
Interest: payment for physical capital
Shows the relationship between the quantity of labor a business hires and the amount of output those workers can produce
Three phases of the law of diminishing marginal returns:
Increasing marginal product
Decreasing marginal product (diminishing marginal returns)
Negative marginal product
MRP = Marginal Revenue ร Marginal Product
Used to determine how many workers a business would like to hire
Formula: MRP = P ร MP, where P is the price and MP is the marginal product
Definition: The quantity of labor a firm is willing and able to hire at a given wage rate
Characteristics:
Downward sloping demand curve
Inverse relationship between the wage and the number of workers hired
When the wage falls, the number of workers hired increases
Definition: The sum of each firm's marginal revenue product
Characteristics:
Downward sloping demand curve
Inverse relationship between the wage and the number of workers hired
When the wage falls, the number of workers hired increases
Definition: The quantity of labor households are willing and able to supply at a given wage rate
Characteristics:
Upward sloping supply curve
Direct relationship between the wage and the quantity supplied
When the wage rises, the quantity supplied increases
Definition: The point where the supply and demand curves intersect
Characteristics:
Determined by the interaction between supply and demand
Equilibrium wage: the wage at which the quantity supplied equals the quantity demanded
Equilibrium quantity: the quantity of labor hired at the equilibrium wage
Changes in Demand:
Increase in demand: shifts the demand curve rightward
Decrease in demand: shifts the demand curve leftward
Changes in Supply:
Increase in supply: shifts the supply curve rightward
Decrease in supply: shifts the supply curve leftward
Characteristics:
Many buyers of labor
Each individual firm is a wage-taker
The market sets the wage
Marginal Resource Cost (MRC):
The amount of money a business has to pay to hire one more worker
Equal to the market wage
Definition: The marginal revenue product curve
Characteristics:
Upward sloping portion (increasing marginal returns)
Downward sloping portion (decreasing marginal returns)
Profit-maximizing quantity: where the marginal revenue product equals the marginal resource cost
Definition: A market structure in which there is only one buyer of a resource (labor)
Characteristics:
The firm's supply curve is the labor supply curve
The firm must increase wages to hire more workers
The relationship between the wage and the marginal resource cost is different from that in a perfectly competitive market## Monopsony in Labor Markets ๐
The marginal resource cost is the change in the total resource cost.
In a monopsony, the marginal resource cost is greater than the wage.
The supply of labor is upward sloping, represented by the market supply curve.
The marginal resource cost curve is above the supply curve.
The firm's demand curve is the marginal revenue product.
The profit-maximizing quantity of labor is where the marginal revenue product equals the marginal resource cost.
In a perfectly competitive market, the equilibrium wage is where the supply and demand curves intersect.
The equilibrium quantity of labor is where the supply and demand curves intersect.
A monopsony pays lower wages and hires fewer workers than a perfectly competitive market.
Monopsonies are not allocatively efficient.
There is deadweight loss in a monopsony.
Take the marginal product of each resource and divide it by the price of the resource.
The profit-maximizing combination is found where the marginal product of labor divided by the price of labor equals the marginal product of capital divided by the price of capital.
Resource | Marginal Product | Price | Marginal Product per Dollar |
---|---|---|---|
Labor | 30 | 15 | 2 |
Capital | 100 | 25 | 4 |
In this example, the firm should employ more capital and less labor.