Introduction to Factor Markets
Rachel Carter
9 min read
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Study Guide Overview
This study guide covers factor markets in AP Microeconomics, focusing on the factors of production (land, labor, capital, entrepreneurship) and their respective payments (rent, wage, interest, profit). It explains derived demand, labor demand and supply, and the law of diminishing marginal returns. Key calculations include Marginal Resource Cost (MRC), Marginal Product (MP), and Marginal Revenue Product (MRP), culminating in the profit maximization rule of MRP = MRC. The guide also includes practice questions and exam tips.
#AP Microeconomics: Factor Markets - Your Night-Before Guide
Hey there! Let's get you prepped and confident for your AP Microeconomics exam. We're diving into factor markets, making sure everything clicks, and you're ready to ace it! 🚀
#Understanding Factor Markets
#What's a Factor Market?
Think of the factor market (also called the resource market) as the place where businesses go to get what they need to produce stuff. It's all about the factors of production: land, labor, capital, and entrepreneurship. Households own these and sell them to businesses.
- Factors of Production:
- Land: Payment is rent
- Labor: Payment is wage
- Capital: Payment is interest
- Entrepreneurship: Payment is profit
Remember: Households supply factors, and businesses demand them. It's the flip side of the product market!
#Derived Demand
The demand for resources isn't direct; it's derived from the demand for the products they help create. Think of it this way: nobody wants a carpenter just for the sake of having a carpenter. They want a carpenter because they want a house. If the demand for houses goes up, the demand for carpenters will also increase.
- Example: If everyone suddenly wants more electric cars, the demand for lithium (a resource) will increase.
#Labor Demand and Supply
Just like in the product market, labor demand and supply have their own curves:
- Demand for Labor: Downward sloping. As wages fall, businesses want to hire more workers.
- Supply of Labor: Upward sloping. As wages rise, more people are willing to work.
Think of it like this: the labor market is just like any other market. Lower prices (wages) mean higher demand and higher prices mean higher supply.
A labor demand curve. As wage rises, the quantity of labor demanded by firms decreases, and vice versa
#Law of Diminishing Marginal Returns
This is a big one! As you add more and more of a variable resource (like labor) to a fixed resource (like a factory), the extra output from each new input will eventually decrease. It’s like adding too many cooks to a kitchen – they start getting in each other’s way.
- Example: A small bakery with one oven will see diminishing returns as they keep adding bakers. At some point, extra bakers won't add much to the total output because they're all fighting for oven space.
Don't confuse diminishing returns wit...
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