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					AP Microeconomics                                                       Factor Markets Notes




THE FACTOR MARKETS

  Factor price
    The price of a factor of production.
      •  The wage rate is the price of labor.
      •  The interest rate is the price of capital.
      •  Rent is the price of land.

  Factor market
      •  A market for labor, capital, or land.
      •  households provide firms with labor and capital in
         return for wages and interest




THE FACTOR MARKETS
Labor Markets
    A collection of people and firms who are trading labor
     services.
Financial Markets
    A collection of people and firms who are lending and
     borrowing (financial captial) to finance the purchase of
     physical capital.
    The two main types of financial markets are stock
     markets and bond markets
Land Markets
    A market in which raw materials are traded are called a
     commodity market.




DEMAND FOR A FACTOR OF PRODUCTION

  Derived demand
    The demand for a factor of production, which is derived from the
     demand for the goods and services it is used to produce.
    product market determines demand in the factor market
       •  if consumers demand pizza, then firms will demand pizza
          ovens, pizza deliverers, etc.
       •  if consumers don’t demand pizza, then firms won’t demand
          pizza ovens or labor.

  Value of marginal product
    The value to a firm of hiring one more unit of a factor of
     production, which equals price of a unit of output multiplied by
     the marginal product of the factor of production.
    Essentially the same as a demand curve.




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 AP Microeconomics                                               Factor Markets Notes




DEMAND FOR A FACTOR OF PRODUCTION




DEMAND FOR A FACTOR OF PRODUCTION


The orange
line is the
firm’s value of
the marginal
product of
labor curve.




 A Firm’s Demand for Labor
    A firm hires labor up to the point at which the value of
     marginal product equals the wage rate.
    If the value of marginal product of labor exceeds the
     wage rate, a firm can increase its profit by employing
     one more worker.
    If the wage rate exceeds the value of marginal product
     of labor, a firm can increase its profit by employing one
     fewer worker.




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 AP Microeconomics                                                 Factor Markets Notes




A Firm’s Demand for Labor Curve

This figure shows the demand
for labor at Max’s Wash’n’ Wax.

At a wage rate of $10.50 an
hour, Max makes a profit on the
first 2 workers but would incur a
loss on the third worker.
So Max’s quantity of labor
demanded is 2 workers.
Max’s demand for labor curve is
the same as the value of
marginal product curve.




 WAGES AND EMPLOYMENT

 The Supply of Labor
      People supply labor to earn an income. Many factors
       influence the quantity and quality of labor that a person
       plans to provide, but the wage rate is a key factor.


 Monopsony
      A non-competitive labor market
         •  Caused by education, training and personal
            preference
         •  Signaling




WAGES AND EMPLOYMENT
1. At a wage 2 …supplies     3. As the wage rate rises, Larry’s
  rate of      30 hours of      quantity of labor supplied …
  $10.50 an    labor a week.
  hour, Larry…                                  4. …increases,

                                                  5. …reaches a
                                                     maximum, …
                                                   6. …then
                                                      decreases.




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 AP Microeconomics                                                   Factor Markets Notes




Market Supply Curve
A market supply curve shows the quantity of labor supplied by
all households in a particular job.
It is found by adding together the quantities of labor supplied by
all households at each wage rate.
If the wage rate exceeds
$10.50 an hour, the quantity
demanded is less than the
quantity supplied and the
wage rate falls.
If the wage rate is below
$10.50 an hour, the quantity
demanded exceeds the
quantity supplied and the
wage rate rises.




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