AP Microeconomics Unit 5
Review
Last review
Factor Markets
Reminders
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Unit 5: Factor Markets
Equilibrium
Wage (the price of labor) is set by the market.
EX: Supply and Demand for Carpenters
Wage
Labor
Supply
$30hr
Labor
Demand
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Quantity of Workers
4
3 Shifters of Resource Demand
1.) Changes in product Demand
• Resource demand moves in same direction as
product demand.
2.) Changes in resource Productivity
• Technological advances improve resources
3.) Changes in Other Resources Prices
– Substitute Resources
• Demand for a resource moves in the same direction
as the price of a substitute resource
– Complementary Resources
• Demand for a resource moves in the opposite
direction as the price of a complementary resource
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5
Resource Supply Shifters
Supply Shifters for Labor
1. Number of qualified workers
• Education, training, & abilities required
2. Government regulation/licensing
Ex: What if waiters had to obtain a license to serve
food?
3. Personal values regarding leisure time and
societal roles.
Ex: Why did the US Labor supply increase during
WWII?
Why do some occupations get paid more
than others?
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MARGINAL REVENUE PRODUCT (MRP)
(sometimes value of marginal product of labor)
• MRP=change in total revenue from one more unit of input
• MRP= change in total revenue
change in resource quantity
Units of
Resource
(QL)
Total
Product
(TP)
Marginal
Product
(MP)
Product
Price
(P)
Total
Revenue
(TR)
Marginal
Revenue
Product
(MRP)
0
0
X
$2
$0
X
1
2
7
13
7
6
$2
$2
$14
$26
$14
$12
3
4
18
22
5
4
$2
$2
$36
$44
$10
$8
5
25
3
$2
$50
$6
6
27
2
$2
$54
$4
7
28
1
$2
$56
$2
Marginal resource cost (MRC)
also called marginal factor cost (MFC)
• MRC=the change in total costs that results from hiring another unit of
a resource
• MRC=change in total cost
change in units of input
THE SUPPLY OF LABOR: PURE COMPETITION IN THE HIRE OF
LABOR
Units of
Labor
Wage Rate
Total Labor
Cost (Wage
Bill)
Marginal
Resource
(Labor) Cost
0
$6
$0
X
1
$6
$6
$6
2
$6
$12
$6
3
$6
$18
$6
4
$6
$24
$6
5
$6
$30
$6
6
$6
$36
$6
SUPPLY OF AND DEMAND FOR LABOR IN A PERFECTLY COMPETITIVE
LABOR MARKET
Firm
Labor Market
Wage
Rate
Wage
Rate
S
S=MRC
D=mrp
Q LABOR
D=MRP
Q LABOR
THE SUPPLY OF LABOR: MONOPSONY IN THE HIRE OF LABOR
Units of
Labor
Wage Rate
Total Labor
Cost (Wage
Bill)
Marginal
Resource
(Labor) Cost
0
$5
$0
X
1
6
6
$6
2
7
14
8
3
8
24
10
4
9
36
12
5
10
50
14
6
11
66
16
SUPPLY OF AND DEMAND FOR LABOR IN A MONOPSONISTIC
LABOR MARKET
MRC
Wage
Rate
S
MRP
Q LABOR
LEAST-COST RULE
• When the last dollar spent on each resource yields the same marginal
product (MP)
• MP of Labor
MP of Capital
=
Price of Labor
Price of Capital
PROFIT-MAXIMIZING RULE
• When each resource is employed to the point at which its marginal
revenue product equals its price
• MRPL
MRPC
=
= 1
PL
PC