Introduction to Factor Markets - AP Microeconomics

Explain the impact of technological advancement on labor demand.

Increases demand if it complements labor. If technology enhances worker productivity, demand rises.
What is the equilibrium wage rate?

The wage where labor supply equals labor demand. Market-clearing wage where quantity supplied equals quantity demanded.
Define the term 'capital' in factor markets.

Man-made resources used in production. Physical assets like machinery, buildings, and equipment used in production.
What effect does a subsidy on production have on factor demand?

Increases factor demand. Lower production costs increase profitability and input demand.
Which factor market is primarily concerned with interest rates?

Capital. Interest is the price paid for borrowing or using capital.
State the formula for marginal revenue product (MRP).

MRP = MP × MR. Multiplies marginal product by marginal revenue to find factor's value.
Define 'marginal cost of labor'.

The additional cost of hiring one more worker. The wage increase needed to attract one additional worker.
Define 'human capital'.

Skills and knowledge acquired by workers. Education and training that enhance worker productivity.
Define marginal product (MP).

The additional output from using one more unit of a factor. Measures productivity increase from each additional unit of input.
What is the relationship between MRP and factor demand?

MRP determines the demand for a factor. Firms hire factors up to where $MRP$ equals factor price.
What is the relationship between factor price and quantity supplied?

Direct relationship; price increases lead to more supplied. Law of supply applies to factor markets too.
What does the term 'entrepreneurship' entail in factor markets?

The ability to coordinate and manage production. Involves organizing resources, taking risks, and making business decisions.
What role does 'risk' play in entrepreneurship?

Entrepreneurs assume risk for potential profit. Risk-taking is rewarded with potential profits from successful ventures.
Identify the primary factor affecting capital supply.

Interest rates. Higher rates increase the cost of borrowing capital.
State the impact of unionization on wages.

Generally increases wages. Collective bargaining gives workers more negotiating power.
How does a decrease in labor supply affect wages?

Wages increase. Reduced supply creates scarcity, driving wages up.
Choose the correct effect: Increased immigration affects labor supply how?

Increases labor supply. More workers enter the market, shifting supply rightward.
What is the relationship between capital intensity and labor demand?

More capital intensity may reduce labor demand. Capital and labor can be substitutes in production.
What is the primary factor affecting land supply?

Geographical limitations. Fixed land area makes supply perfectly inelastic.
How does a firm's demand for labor change with an increase in product demand?

It increases. Higher product demand increases marginal revenue product of labor.
What is the supply curve for labor typically shaped like?

Upward sloping. Higher wages incentivize more people to work.
What shifts the labor supply curve?

Changes in population, preferences, and alternative opportunities. These factors change workers' willingness to supply labor.
What is the effect of a minimum wage on employment in a competitive market?

It can cause unemployment if set above equilibrium. Price floor above equilibrium creates surplus of labor.
Identify the key determinant of labor demand.

The marginal productivity of labor. Higher productivity makes workers more valuable to employers.
What is a factor market?

A market where factors of production are bought and sold. Where businesses buy inputs like labor and land to produce goods and services.
What happens to the demand for a factor when its productivity increases?

Demand increases. Higher productivity increases marginal revenue product.
What is the primary factor payment for land?

Rent. Payment for using natural resources and real estate.
What is derived demand?

Demand for a factor of production arising from demand for the good it produces. Factor demand depends on consumer demand for the final product.
What is the substitution effect in labor markets?

Increased work hours as wages rise. Workers substitute leisure for work when wages increase.
How is economic rent defined in factor markets?

Payment to a factor in excess of its opportunity cost. Earnings above what's needed to keep the factor in current use.
Identify the term for payment to capital in factor markets.

Interest. The return earned by capital owners for providing funds.
How does an increase in labor productivity influence wages?

It tends to increase wages. Higher productivity increases workers' marginal revenue product.
Which factor is most directly associated with wages?

Labor. Wages are the primary payment for human work effort.
What are the factors of production?

Land, labor, capital, and entrepreneurship. The four basic inputs needed for all production processes.
How does an increase in the price of a good affect labor demand?

Increases labor demand. Higher output prices increase marginal revenue product.
State the law of diminishing marginal returns.

Adding more of one factor, holding others constant, decreases marginal output. Eventually each additional unit contributes less to total output.
What does a monopsony in labor markets imply?

A single buyer of labor. Market power allows paying wages below competitive levels.

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