knowt ap exam guide logo

5.1: Factor Markets

The Four Factors Of Production

  1. Land: All Natural Resources That Are Used To Produce Goods And Services

    • Paid rent

  2. Labor: Any Effort A Person Devotes To A Task For Which That Person Is Paid

    • Paid wage

  3. Capital

    1. Physical Capital: Any Human-made Resource That Is Used To Create Other Goods And Services

    2. Human Capital: Any Skills Or Knowledge Gained By A Worker Through Education And Experience

    • Paid interest

  4. Entrepreneurship: Ambitious Leaders That Combine The Other Factors Of Production To Create Goods And Services

    • Paid profit

  • In The Product Market, Individuals Pay Businesses For Goods And Services

  • In The Factor Market, Businesses Pay Individuals For The Use Of Resources

The Labor Market

Labor Demand And Supply

  • Demand For Labor

    • Demand For Labor: The Different Quantities Of Workers That Businesses Are Willing And Able To Hire At Different Wages

    • There Is An Inverse Relationship Between Wage And Quantity Of Labor Demanded

    • Demanded By Firms — Demand For Labor Shows The Quantities Of Workers That Firms Hire At Different Wages

  • Supply Of Labor

    • Supply Of Labor: The Different Quantities Of Individuals That Are Willing And Able To Sell Their Labor At Different Wages

    • There Is A Direct Relationship Between Wage And Quantity Of Labor Demanded

      • Workers Have A Trade-off Between Work And Leisure

    • Supplied By Individuals — Supply Of Labor Is The Quantity Of Workers That Are Willing To Work At Different Wage Rates

      • Higher Wages Give Workers Incentive To Leave Other Industries And Give Up Leisure Activities

  • Equilibrium

    • Wage (the Price Of Labor) Is Set By The Market

    • Minimum Wage: A Minimum Amount That Employers Are Allowed To Pay Their Employees (a Wage Floor)

  • Marginal Revenue Product

    • Marginal Revenue Product: The Additional Revenue Generated By An Additional Worker (resource)

    • In Perfectly Competitive Product Markets, The MRP = MP X Price

    • MRP = [change In Total Revenue]/[change In Inputs]

  • Other Reasons For Differences In Wage

    • Labor Market Imperfections

      • Insufficient/misleading Job Information — Prevents Workers From Seeking Better Employment

      • Geographical Immobility — Many People Are Reluctant Or Too Poor To Move, So They Must Accept A Lower Wage

      • Unions — Collective Bargaining And Threats To Strike Often Lead To Higher Equilibrium Wages

      • Wage Discrimination — Some People Are Paid Differently For Doing The Same Job Based On Factors Such As Race, Gender, And Age (illegal)

5.1: Factor Markets

The Four Factors Of Production

  1. Land: All Natural Resources That Are Used To Produce Goods And Services

    • Paid rent

  2. Labor: Any Effort A Person Devotes To A Task For Which That Person Is Paid

    • Paid wage

  3. Capital

    1. Physical Capital: Any Human-made Resource That Is Used To Create Other Goods And Services

    2. Human Capital: Any Skills Or Knowledge Gained By A Worker Through Education And Experience

    • Paid interest

  4. Entrepreneurship: Ambitious Leaders That Combine The Other Factors Of Production To Create Goods And Services

    • Paid profit

  • In The Product Market, Individuals Pay Businesses For Goods And Services

  • In The Factor Market, Businesses Pay Individuals For The Use Of Resources

The Labor Market

Labor Demand And Supply

  • Demand For Labor

    • Demand For Labor: The Different Quantities Of Workers That Businesses Are Willing And Able To Hire At Different Wages

    • There Is An Inverse Relationship Between Wage And Quantity Of Labor Demanded

    • Demanded By Firms — Demand For Labor Shows The Quantities Of Workers That Firms Hire At Different Wages

  • Supply Of Labor

    • Supply Of Labor: The Different Quantities Of Individuals That Are Willing And Able To Sell Their Labor At Different Wages

    • There Is A Direct Relationship Between Wage And Quantity Of Labor Demanded

      • Workers Have A Trade-off Between Work And Leisure

    • Supplied By Individuals — Supply Of Labor Is The Quantity Of Workers That Are Willing To Work At Different Wage Rates

      • Higher Wages Give Workers Incentive To Leave Other Industries And Give Up Leisure Activities

  • Equilibrium

    • Wage (the Price Of Labor) Is Set By The Market

    • Minimum Wage: A Minimum Amount That Employers Are Allowed To Pay Their Employees (a Wage Floor)

  • Marginal Revenue Product

    • Marginal Revenue Product: The Additional Revenue Generated By An Additional Worker (resource)

    • In Perfectly Competitive Product Markets, The MRP = MP X Price

    • MRP = [change In Total Revenue]/[change In Inputs]

  • Other Reasons For Differences In Wage

    • Labor Market Imperfections

      • Insufficient/misleading Job Information — Prevents Workers From Seeking Better Employment

      • Geographical Immobility — Many People Are Reluctant Or Too Poor To Move, So They Must Accept A Lower Wage

      • Unions — Collective Bargaining And Threats To Strike Often Lead To Higher Equilibrium Wages

      • Wage Discrimination — Some People Are Paid Differently For Doing The Same Job Based On Factors Such As Race, Gender, And Age (illegal)

robot