Skip to content
Marlbridge
Free trial

Flashcards · AP® Microeconomics · Unit 5

Unit 5: Factor Markets flashcards

24 cards on topics 5.1 to 5.4. Pick a topic or study the whole unit.

Study mode needs JavaScript. Every card is listed below, so you can still cover the answers and test yourself.

All 24 cards

For a quick read-through or printing. Cover the right-hand side to test yourself.

5.1 Introduction to Factor Markets

What are factor markets?
Markets for labour, capital and land. Households sell factor services and firms buy them, the reverse of a product market. Labour earns a wage, capital interest and land rent.
Why is labour demand a derived demand?
It comes from the demand for the product the workers make. Bakeries want bakers only because people buy bread.
What is marginal revenue product (MRP)?
The revenue added by one more worker: MRP = ΔTR ÷ ΔL = MP × MR, in dollars. For a price taker in the output market, MRP = MP × P. A firm with market power has MRP = MP × MR, less than MP × P.
What is marginal resource cost (MRC)?
The extra cost of one more unit of a factor: MRC = ΔTC ÷ ΔL, also called marginal factor cost. For a wage taker, MRC = the wage. Fixed cost is not part of MRC.
Why does labour demand slope down and labour supply slope up?
Demand: MRP falls as workers are added, so a lower wage makes more workers worth hiring. Supply: a higher wage raises the opportunity cost of leisure and draws workers from other jobs.
A worker adds 6 units of output, each selling for $15 in a competitive market. What is the worker's MRP?
6 × $15 = $90. Use marginal product, never total product.

5.2 Changes in Factor Demand and Factor Supply

What shifts labour demand?
A change in MRP at every quantity: the output price (often from product demand), worker productivity, the prices of other inputs, or the number of firms hiring. A change in the wage is a movement along the curve.
What shifts labour supply?
Immigration, education and training, working conditions, the age distribution, alternative options (higher pay elsewhere shifts it left), preferences for leisure and cultural expectations.
Graph: more qualified electricians are allowed to immigrate. Describe the labour market graph.
Wage on the vertical axis, quantity of labour on the horizontal. Labour supply shifts right from S₁ to S₂; labour demand does not move. The new equilibrium has a lower wage and higher employment.
A worker's MP is 9 units and the output price rises from $10 to $12. What happens?
MRP rises from 9 × 10 = $90 to 9 × 12 = $108, so labour demand shifts right.
Demand for teachers rises while fewer graduates choose teaching. What is certain?
The wage rises. The change in employment is indeterminate without the sizes of the shifts.
What does a fall in the price of machines that replace workers do to labour demand?
It usually shifts labour demand left, as firms use more of the cheaper substitute input.

5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

What is a wage taker in a labour market?
A firm in a perfectly competitive labour market that can hire any number of workers at the market wage. Its MRC = W at every quantity, so the labour supply it faces is horizontal at the market wage.
What is a wage taker's hiring rule?
Hire while MRP exceeds W and stop where MRP = MRC = W, on the falling part of MRP. The firm's MRP curve is its labour demand curve.
A worker adds 12 units that sell for $5 each in a competitive market. The wage is $50. Should the firm hire the worker?
Yes: MRP = 12 × 5 = $60, above the $50 wage. Compare dollars with dollars, not MP with the wage.
What is the least-cost rule with labour and capital?
MP_L ÷ W = MP_K ÷ r. With MP_L = 10, W = $20, MP_K = 30 and r = $40, capital gives 0.75 units per dollar against labour's 0.5, so the firm should use more capital.
What is the profit-maximising rule with two inputs?
MRP_L ÷ W = MRP_K ÷ r = 1. This implies least cost, but least cost alone does not imply maximum profit.
Graph: describe a wage-taking firm beside its labour market.
Market: wage on the vertical axis, quantity of labour on the horizontal; S and D set the wage. Firm: a horizontal line at that wage (S = MRC) and a downward MRP = D curve; the firm hires where they cross. A lower market wage moves it down along MRP.
Can a firm with a monopoly in its output market be a wage taker?
Yes. It is then a wage taker in its labour market but uses MRP = MP × MR, which is below VMP = MP × P.

5.4 Monopsonistic Markets

What is a monopsony?
The single (or dominant) buyer of a type of labour. It faces the upward-sloping market supply of labour, so it is a wage setter: to hire more workers it must offer a higher wage.
Why is a monopsony's MRC above the wage?
With one wage for all, an extra worker costs their wage plus the raise paid to every existing worker. If 10 work for $15 and 11 need $16, the MRC of the 11th = 11 × 16 − 10 × 15 = $26.
Graph: describe a monopsony labour market.
Wage on the vertical axis, quantity of labour on the horizontal. S slopes up; MRC lies above S, steeper, with the same vertical intercept; MRP = D slopes down. Hire Lm where MRC = MRP, then read the wage Wm from S at Lm. The competitive point is where S crosses MRP.
How does a monopsony outcome compare with a competitive labour market?
It hires fewer workers at a lower wage, and the wage is below MRP. The result is inefficient: there is a deadweight loss.
What is MRC for a straight-line labour supply curve W = a + bL?
MRC = a + 2bL: the same intercept and twice the slope.

Study Unit 5 further

AP® and Advanced Placement® are trademarks registered by the College Board, which is not affiliated with, and does not endorse, this website. Marlbridge is an independent tuition provider. It is not an authorized AP course provider, an AP school or an exam centre, and these resources are not official College Board materials. Reading them or doing simulations does not meet the laboratory requirement of an AP science course.