AP Economics
Mr. Bernstein
Module 69:
Factor Markets: Introduction and Factor
Demand
December 2015
AP Economics
Mr. Bernstein
Factors of Production
• AKA “resources” or “inputs”
• Land
• Resources provided by nature
• Labor
• Work done by humans
• Capital
• Physical Capital such as tools, buildings, machinery, etc.
• Human Capital – improvement in labor due to education,
training…may be the most important factor in modern econ.
• Entrepreneurship
• Talent for bringing together resources for innovative
production
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AP Economics
Mr. Bernstein
Factor Prices
• Factor prices allocate resources among
producers
• The demand for a factor of production is a
derived demand (derived from the output being
producted)
• Factor Distribution of Income: Payments to labor
are most of economy’s total income (71% )
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AP Economics
Mr. Bernstein
Marginal Productivity and Factor Demand
• MP = Marginal Product of one additional unit
• ie MPL is additional output from hiring one more worker
• VMP = Value of Marginal Product
• ie VMPL, is additional value from hiring one more worker;
= MPL x P
• VMPL = MRP if Labor Market is perfectly competitive but will
be > MRP in imperfect Labor Market
• VMP curve (or MRP curve) is the demand curve for a
factor
• If a unit of labor costs W, the Profit-Maximizing Rule is
to hire worker if VMPL >= W…~= MRP = MRC (aka MFC)
• Law of Demand applies in factor markets
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AP Economics
Mr. Bernstein
What Causes Shifts in Factor Demand Curves?
• Change in price of goods
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If price of product rises, VMP (MRP) also rises
Example: NFL players worth more if league’s TV package rises
Example: Airline pilot is worth less as ticket prices fall
Labor demand is derived from product demand
• Change in supply of other factors
• Factors are often paired (ie labor and capital) so increase in
supply of one increases VMP (MRP) of the other
• Change in technology
• Advances in technology increase VMP (MRP)
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