AP Microeconomics AMSCO Guided Notes
5.1: Introduction to Factor Markets
AP Microeconomics Guided Notes
AMSCO 5.1 - Introduction to Factor Markets
Essential Questions
- What effects do factor prices have on people and businesses?
I. Understanding Factor Markets
1. What is a factor and how does it differ from a product in economic terms?
2. What are the four factors of production and what does each contribute to production?
3. How do demand and supply curves in factor markets compare to those in product markets?
II. Understanding Factor Prices
1. What is a factor price and what are the four specific names for factor prices?
2. How do wages and salaries differ, and why are both considered payments to labor?
3. What is interest in the context of factor markets and how does it relate to capital?
4. What does profit represent as a factor price and what does it reward?
III. Understanding the Decision to Hire
1. What are the three main concepts that influence a firm's decision to hire workers?
2. How can an increase in worker productivity affect both employment levels and wage rates?
IV. How Wage Rates Affect Employment
1. What is the relationship between wage rates and the quantity of labor demanded by firms?
V. How Wage Rates Affect Labor Supply
1. What is the relationship between wage rates and the quantity of labor supplied in a market?
VI. What Factor Prices Convey
1. How do factor prices provide incentives to workers and businesses?
2. What information do factor prices convey to people and businesses in a labor market?
VII. Calculating Marginal Revenue Product and Marginal Resource Cost
A. Understanding Marginal Revenue Product
1. What is marginal revenue product and what formula is used to calculate it?
2. Why does marginal revenue product initially increase but then begin to decrease as more workers are hired?
3. How do increasing marginal returns and diminishing marginal returns affect the marginal product of labor?
B. Calculating Marginal Revenue Product
1. What are the two reasons that marginal revenue product will decline?
2. How does the market structure (perfectly competitive versus imperfectly competitive) affect the rate at which MRP declines?
C. Calculating Marginal Resource Cost
1. What is marginal resource cost and what formula is used to calculate it?
D. Comparing Marginal Revenue Product and Marginal Resource Cost
1. What hiring decision should a firm make when MRP is greater than MRC, and why?
2. What is the optimal level of hiring and what condition must be met to achieve it?
3. How do changes in wage rates affect the number of workers a firm will hire?
Key Terms
factor
factor market
factors of production
factor price
wages
interest
rent
profit
productivity
output price
factor cost
marginal revenue product
marginal resource cost