Summary AP Microeconomics Unit 5: Factor Markets

Factor Markets: markets in which factors of production are bought + sold
Factor Prices: prices in factor markets

FACTORS OF PRODUCTION
1.​ Labor: work done by human beings
2.​ Land: resources provided by nature
3.​ Capital
a.​ Physical - manufactured equipment/resources
i.​ ex. buildings, tools, machines
b.​ Human - improvement in labor created by edu + knowledge
4.​ Entrepreneurship: risk-taking activities
a.​ Bring resources together for innovative production

Derived demand: demand for the factor is derived from demand for firm's output

*Factor markets are where most of us get income
●​ Wages + salaries = income from selling labor
●​ Own stock in a company = physical capital
●​ Renting out land
●​ Profits for successful entrepreneurs

Factor distribution of income: how total income of the economy is divided among land, labor,
capital, entrepreneurship
●​ Determined by factor prices

Marginal Productivity and Factor Demand
●​ Most factor markets are perfectly competitive

, ○​ Buyers + sellers are price-takers
○​ Marginal cost for employer = wage
○​ Marginal benefit for employer = marginal product of labor (MPL)
■​ Marginal product = marginal physical product (MPP)

Price-taking firm's optimal output rule: a firm's output is maximized by producing where

MC = MP
W = wage rate (inc. in cost from employing another work)
P x MPL = benefit from employing another work (price of product x how much is
produced)
VMPL = P x MPL = value of marginal product of labor
**If VMPL > W, hire another worker**


VMPL = W = PROFIT-MAX = OPTIMAL POINT
VMPL = PRODUCER'S INDIVID. DEMAND CURVE




FOR ALL FACTORS OF PRODUCTION, keep adding more units until
MP of the last unit = factor's price