1. Factor Markets: Introduction and Factor Demand
AP Economics
Mr. Bernstein
Module 69:
Factor Markets: Introduction and Factor Demand
December 2017

2. AP Economics Mr. Bernstein
Factors of Production
AKA “resources” or “inputs”
Land
Resources provided by nature
Labor
Work done by humans
Capital
Physical Capital such as tools, buildings, machinery, etc.
Human Capital – improvement in labor due to education, training…may be the most important factor in modern econ.
Entrepreneurship
Talent for bringing together resources for innovative production

3. AP Economics Mr. Bernstein
Factor Prices
Factor prices allocate resources among producers
The demand for a factor of production is a derived demand (derived from the output being producted)
Factor Distribution of Income: Payments to labor are most of economy’s total income (71% )

4. AP Economics Mr. Bernstein
Marginal Productivity and Factor Demand
MP = Marginal Product of one additional unit
ie MPL is additional output from hiring one more worker
VMP = Value of Marginal Product
ie VMPL, is additional value from hiring one more worker;
= MPL x P
VMPL = MRP (Marginal Revenue Product) if Labor Market is perfectly competitive but will be > MRP in imperfect Labor Market
VMP curve (or MRP curve) is the demand curve for a factor
If a unit of labor costs W, the Profit-Maximizing Rule is to hire worker if VMPL >= W…~= MRP = MRC (aka MFC)
Law of Demand applies in factor markets

5. AP Economics Mr. Bernstein
What Causes Shifts in Factor Demand Curves?
Change in price of goods
If price of product rises, VMP (MRP) also rises
Example: NFL players worth more if league’s TV package rises
Example: Airline pilot is worth less as ticket prices fall
Labor demand is derived from product demand
Change in supply of other factors
Factors are often paired (ie labor and capital) so increase in supply of one increases VMP (MRP) of the other
Example: Increase in land allows each farm worker to produce more wheat, increasing their worth
Change in technology
Advances in technology increase VMP (MRP)