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Unit 5: Factor Markets

4 dot points across 4 inquiry questions. Click any dot point for a focused answer with worked past exam questions where available.

What shifts the demand for and supply of a factor like labor, and how does that change the equilibrium wage and employment?

Topic 5.2 Changes in Factor Demand and Factor Supply: identify the determinants that shift factor demand and factor supply, and predict the effect on the equilibrium factor price and quantity.
A focused answer to AP Microeconomics Topic 5.2, covering the determinants that shift factor (labor) demand and supply, including product demand, productivity, prices of other factors, and the number of workers, and how shifts change the equilibrium wage and employment, with worked exam-style questions.
9 min answer →

How is the demand for a factor like labor derived, and what does marginal revenue product tell a firm about hiring?

Topic 5.1 Introduction to Factor Markets: explain that factor demand is derived demand, define and calculate marginal revenue product, and state the hiring rule that marginal revenue product equals marginal factor (resource) cost.
A focused answer to AP Microeconomics Topic 5.1, covering derived demand, marginal product and marginal revenue product, marginal factor (resource) cost, and the profit-maximizing hiring rule that marginal revenue product equals marginal factor cost, with worked exam-style questions.
10 min answer →

How does a single buyer of labor set the wage and employment, and why are both lower than in a competitive market?

Topic 5.4 Monopsonistic Markets: explain why a monopsonist's marginal factor cost lies above the labor supply curve, find the monopsony wage and employment, and compare them with the competitive outcome.
A focused answer to AP Microeconomics Topic 5.4, covering monopsony as a single buyer of a factor, why marginal factor cost lies above the supply curve, how the monopsonist sets employment where marginal revenue product equals marginal factor cost and the wage off the supply curve, and the resulting lower wage and employment, with worked exam-style questions.
10 min answer →

How does a firm in a competitive factor market decide how much of each input to hire, and how does it least-cost combine inputs?

Topic 5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets: apply the marginal revenue product equals wage rule for a wage-taking firm, and use the least-cost and profit-maximizing input combination rules across multiple factors.
A focused answer to AP Microeconomics Topic 5.3, covering the hiring rule for a firm in a competitive factor market, the least-cost combination of inputs rule, the profit-maximizing input rule, and how a firm chooses between labor and capital, with worked exam-style questions.
9 min answer →