AP® Microeconomics Unit 5: Factor Markets
Topic 5.1- Introduction
1. What is the difference between the factor 3. What is derived demand?
market and the product market? The demand for resources is determined (derived) by
Factor markets are where the factors of the products they help produce. (ex: the demand for
production are sold by households to carpenters is derived by the demand of homes)
businesses. Product markets are where 4. Why is the demand for labor downward-sloping?
goods/services are sold by businesses. The number of workers that businesses are willing to
2. What are the four factors of production? hire increases as the wage falls.
Land, labor, capital, entrepreneurship 5. Why is the supply for labor upward-sloping?
3. What are the four factor payments? The number of workers that are willing and able to
Rent, wage, interest, and profit sell their labor increases as the wage increases
Topic 5.2- Changes in Factor Demand and Supply
1. Draw a competitive market for plumbers. 3. What shifts the demand for labor?
Label the equilibrium wage and quantity - Change in the demand for the product
S1 S - Change in the productivity of the resource
Wage - Change in the price of related resources (substitute
W1 and complementary resources)
4. What shifts the supply for labor?
We Wage- increases - Number of qualified workers (immigration)
Quantity- decreases - Government regulation/licensing
- Cultural expectations
D 5. If the equilibrium wage for electricians is $15 an
hour and the government established a minimum
Q1 Qe Quantity Labor wage of $10 an hour, what will happen to the wage
2. Assume the government establishes a and quantity? Wage and quantity will stay the same.
certification process that makes it harder to be a The minimum wage is below equilibrium and is not
plumber. Show what happens on the graph. binding for electricians
6. Draw the results of a minimum wage. Label 7. If the demand for houses increases, the wage of
the quantity supplies (Qs) and the quantity carpenters will _↑__ and the quantity will _↑__.
demanded (Qd) 8. Assume bricks and wood are substitute resources.
If the price of bricks increases, the price of wood
Wage
_↑___ and the quantity _↑___.
Unemployment SL
9. If the government removes all regulations for
A $20 minimum becoming a dentist. The wages for dentists will
$20 wage would
__↓__ and the quantity will _↑___.
increase Qs and
We 10. If demand for accountants falls at the same time
decrease Qd
resulting in a that the supply increases, the wage will __↓__
surplus of labor and the quantity will __be indeterminate___.
(unemployment) 11. Will a binding minimum wage lead to relatively
less unemployment when the demand for labor is
DL inelastic or when it is elastic? Explain. When the
demand is inelastic there will be less
Qd Qs Quantity of Labor unemployment. The quantity demanded will
decrease a little since employers still need these
workers
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Topic 5.3- Perfectly Competitive Factor Markets
1. Define marginal revenue product (MRP) 2. Define marginal resource cost (MRC)
The additional revenue generated by an additional The additional cost of an additional
resource/worker. resource/worker. Also called marginal factor cost
3. Assume perfectly competitive product and labor Marginal
Number of Total Marginal
markets. If the price of the product is $5 and the Revenue
Workers Product Product
wage is $20, how many workers should be Product
hired? 3 0 0 - -
4. How much is the profit or loss? $90 - $60 = $30 1 5 5 $25
5. Assume that this firm develops a process that 2 13 8 $40
makes only their workers more productive. The 3 18 5 $25
wage will __stay the same___ and the quantity 4 21 3 $15
will ___↑___. 5 20 -1 $-5
6. Draw side-by-side graphs showing a perfectly competitive market and firm hiring workers
Wage Market Wage Firm
S
WM S= MRC
D= MRP
D
QM Quantity Q Quantity
Topic 5.4- Monopsonistic Markets 7. If the government sets a binding minimum
1. Draw a monopsony and label the unregulated wage, will the MRP of the last worker hired
wage and quantity increase, decrease, or stay the same? Increase
Wage
8. What is the least cost rule when combing
MRC Supply
resources?
Marginal Product Labor = Marginal Product of Capital
Price of Labor Price of Capital
9. Assume the firm hires the cost-minimizing
combination of labor and capital. The marginal
WM product of the last worker is 60 units and the
marginal product of the last unit of capital is 20
units. If the wage rate is $30 per hour, what is the
MRP = Demand price of capital? $10 per hour
QM Quantity
2. What are the characteristics of a monopsony? 10. Assume that the price of labor falls to $10 per
Only one firm buying resources or hiring workers. hour. The company should __↑__ the number of
Buyer has market power and pays a price (wage) workers and __↓__ the amount of capital.
that is below the competitive price (wage)
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