AP Microeconomics: Factor Markets and Resource Allocation

Factor Market

A market where firms are the buyers and households are the sellers of resources.

Derived Demand

The demand for a resource that results from the demand for the product that resource helps produce.

Marginal Product (MP)

The additional output generated by adding one more unit of input (worker).

Marginal Revenue Product (MRP)

The additional revenue generated by an additional worker.

Marginal Factor Cost (MFC)

The additional cost incurred by hiring one more unit of input.

Profit-Maximizing Hiring Rule

Firms hire resources where the additional revenue equals the additional cost of the worker.

Wage Takers

Firms that must pay the market equilibrium wage.

Law of Diminishing Marginal Returns

As you add more variable resources to fixed resources, the Marginal Product eventually falls.

Shifters of Factor Demand ($D_L$)

Factors that cause the demand curve for labor to shift, such as product demand and productivity.

Shifters of Factor Supply ($S_L$)

Factors that cause the supply curve for labor to shift, such as immigration and leisure preferences.

Least Cost Rule

A firm minimizes costs when the Marginal Product per dollar is equal for all inputs.

Profit Maximizing Combination

The point at which the ratio of Marginal Revenue Product to Price equals 1.

Monopsony

A market with a single buyer of labor.

Monopsony Wage

The wage set in a monopsonistic market, typically lower than in competitive markets.

Deadweight Loss

The loss of economic efficiency that occurs when equilibrium for a good or service is not achieved.

Resource Market

Another term for the Factor Market.

Total Product

The total output produced by all units of input.

Equilibrium Wage

The wage rate at which the quantity of labor demanded equals the quantity of labor supplied.

Market Demand for Labor ($D_L$)

The total demand for labor across all firms in the market.

Perfectly Competitive Product Market

A market structure where many firms sell identical products and no single firm can influence the market price.

Complementary Resources

Resources that work together in the production process, where a change in one affects demand for the other.

Substitute Resources

Resources that can replace each other in the production process.

Market Supply Curve

The aggregate supply of labor across all firms in a market.

Firm Supply Curve

The supply of labor specifically for an individual firm, which is horizontal in perfect competition.

Marginal Revenue (MR)

The additional revenue gained from selling one more unit of product.

Cost Minimization

Producing a specific quantity of output at the lowest possible cost.

Marginal Product per Dollar

The additional output derived from spending one more dollar on an input.

Firm's Demand Curve

The demand curve for labor that indicates how much labor the firm is willing to hire at different wage levels.

Equilibrium Quantity of Labor

The quantity of labor supplied and demanded at the equilibrium wage.

Market Equilibrium

The point where the quantity demanded by firms equals the quantity supplied by households.

Minimum Wage Legislation

Laws that set the lowest legal wage that can be paid to workers.

Labor Supply Curve

A graph that shows the relationship between the wage rate and the quantity of labor supplied.

Diminishing Returns

The principle that as more units of a variable input are added to fixed inputs, the additional output produced eventually decreases.

Price of Labor

The wage or salary paid to workers for their services.

Utility Maximization

The process consumers use to get the most satisfaction from their spending.

Labor Market

A marketplace where workers find paying work and employers find willing workers.

Input

Any resource used in the production process, such as labor, land, and capital.

Output

The goods or services produced by a firm.

Economic Efficiency

The optimal allocation of resources to maximize production and welfare.

Industrial Relations

The relationship between management and workers in an industry.

Skill Level

The level of expertise or training required to perform a job.

Temporary Employment

Work that is not permanent and is scheduled for a limited duration.

Labor Market Equilibrium

The point at which the supply of labor matches the demand for labor, resulting in neither surplus nor shortage.

Human Capital

The skills, knowledge, and experience possessed by an individual.

Labor Force Participation Rate

The percentage of the working-age population that is either employed or actively seeking employment.

Job Market

The market in which employers seek employees and employees seek employment.

Free Market Economy

An economic system where prices for goods and services are determined by open market and consumers.

Competitive Wage,

The wage determined by the forces of supply and demand in a competitive labor market.