#AP Microeconomics: Unit 5 - Factor Markets Study Guide 🚀

This unit makes up 10-13% of the AP Micro exam, so it's crucial to master these concepts! Let's dive in and make sure you're ready.

#Introduction to Factor Markets

#The Flip Side 🔄

Remember the circular flow model? In the product market, households buy goods and services from firms. Well, in factor markets, it's the other way around! Firms are the demanders, buying factors of production (labor, land, capital, and entrepreneurship) from households. It's like looking in a mirror – everything is reversed! 🪞

#Derived Demand 💡

The demand for factors of production is derived demand. This means that the demand for labor (or any factor) depends on the demand for the final product it helps produce. If the demand for smartphones increases, so will the demand for workers who make them. 💥

#Marginal Revenue Product (MRP) and Marginal Resource Cost (MRC)

Firms decide how many workers to hire by comparing the marginal revenue product (MRP) (the additional revenue from hiring one more worker) and the marginal resource cost (MRC) (the cost of hiring one more worker). Firms will hire as long as MRP ≥ MRC.

#Changes in Factor Demand and Factor Supply

#Supply and Demand, but Flipped! 🔀

Just like product markets, factor markets have supply and demand curves. But remember, firms are the demanders, and households are the suppliers.

#Determinants of Factor Demand (R.O.D.)

These factors shift the labor demand curve:

1. Resource Productivity: If workers become more productive, demand for labor increases.

2. Price of Other Resources: If the price of capital (like machines) decreases, firms may use more capital and less labor.

3. Product Demand: If demand for the final product increases, demand for labor to produce it also increases.

#Determinants of Factor Supply (P.I.N.)

These ...