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AP® Microeconomics · Unit 5 · Topic 5.2

Changes in Factor Demand and Factor Supply: Revision Notes (Microeconomics 5.2)

One-page recap of what shifts labour demand and labour supply, how each shift changes the wage and employment, and what happens when both curves shift, with the mistakes that cost marks.

Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.

Recap

  • A change in the wage moves the market along the labour demand and supply curves.
  • Labour demand shifts when MRP changes at every quantity: a change in the output price (often from product demand), in worker productivity, in the prices of other inputs, or in the number of firms hiring.
  • Labour supply shifts with immigration, education and training, working conditions, age distribution, alternative options, preferences for leisure and cultural expectations.
  • Demand up → wage up, employment up. Supply up → wage down, employment up.

Key relationships

Change Curve Direction
Output price rises DL right
Worker productivity rises DL right
Price of a substitute input (machines that replace workers) falls DL usually left
Immigration of workers into the market SL right
More people trained for the job SL right
Safer or more pleasant working conditions SL right
Higher wages in an alternative job SL left
Stronger preference for leisure SL left
Labour demand Labour supply Wage Quantity
↑ ↑ ? ↑
↑ ↓ ↑ ?
↓ ↑ ↓ ?
↓ ↓ ? ↓

Assumptions and scope

  • The labour market is competitive: the wage settles where quantity demanded equals quantity supplied.
  • “Other things constant” for every single shift.

Mistakes to avoid

  1. Shifting a curve because the wage changed.
  2. Shifting supply when the output price changes (it shifts demand).
  3. Shifting demand for a change in working conditions (it shifts supply).
  4. Saying higher pay elsewhere increases supply in this market.
  5. Claiming a definite wage change when both curves shift and no sizes are given.
  6. Unlabelled graphs: name both axes and both curves, and mark old and new equilibria.

Quick self-check

  1. A worker’s MP is 9 units. The output price rises from $10 to $12. What happens to the worker’s MRP? (It rises from $90 to $108.)
  2. A country makes it easier for qualified electricians to immigrate. What happens to the electricians’ wage and employment? (Supply increases: wage falls, employment rises.)
  3. Demand for teachers rises while fewer graduates choose teaching. What is certain? (The wage rises; the change in employment is indeterminate.)

Next: practice questions.

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