Lesson plans · AP Micro Unit 5 · MICRO 5.1, MICRO 5.2, MICRO 5.3, MICRO 5.4
Factor Markets: MRP, Wage Determination, and Monopsony
Essential question: How does a firm decide how many workers to hire, and what changes when only one employer is buying the labor?
3 × 50-minute periods · MICRO 5.1, MICRO 5.2, MICRO 5.3, MICRO 5.4 · prints clean with Cmd/Ctrl+P
Objectives
- Students will be able to explain why labor demand is a derived demand and list what shifts it (output price, productivity, demand for the final product).
- Students will be able to calculate marginal revenue product as marginal product times output price and hire to the rule MRP = MFC.
- Students will be able to draw a correctly labeled competitive labor market and predict wage and employment changes from shifts in labor demand or supply.
- Students will be able to draw the monopsony graph with MFC above supply, identify hiring where MRP = MFC, and read the wage off the supply curve.
- Students will be able to explain why a monopsonist pays a wage below the competitive level.
Materials (all free, no student accounts needed)
Warm-up (12 min)
- Post: 'A pizza shop hires the exact number of cooks it does for a reason. What is it?' Give students 2 minutes to write, then take a few answers.
- Reveal the frame: a firm does not want workers for their own sake, it wants what workers produce and can sell. Introduce the phrase derived demand and connect it to the fifth-cook decision. Preview that today is one clean rule, MRP versus the wage.
Direct instruction (48 min)
- Day 1: build the MRP table from the module's furniture-shop example. Chairs sell for 12 dollars, wage is 72 dollars. The fifth worker makes 8 chairs, so MRP = 12 x 8 = 96 > 72: hire. The sixth makes 5 chairs, MRP = 60 < 72: do not hire. State the rule: hire while MRP is at least the wage.
- Define MRP = MP x output price and explain why MRP falls as you add workers (diminishing marginal product). In a competitive labor market the wage equals marginal factor cost, so the hiring rule is MRP = MFC.
- List the shifters of labor demand (output price, worker productivity, demand for the final good) versus labor supply (number of workers, migration, alternative wages). Stress that a change in the output price shifts labor DEMAND because it changes MRP.
- Day 2: introduce monopsony, a single buyer of labor (a mining town, a lone hospital). Draw MFC above the labor supply curve and explain why: to hire one more worker the firm must raise the wage for everyone, so the marginal cost of labor exceeds the wage.
- Show the monopsony outcome: hire where MRP = MFC, then drop straight down to the SUPPLY curve to set the wage. Both employment and the wage sit below the competitive level. Label this clearly since AP readers deduct for reading the wage off MFC.
Guided practice (45 min)
- Day 1 guided (competitive labor market): project /frq-practice/draw and run the apple-pickers scenario where the world price of apples rises. Ask the class to predict the shift before anyone drags. Cold-call: 'Which curve, and why?' Answer: labor demand right, because higher output price raises every worker's MRP.
- Have a student drag the labor demand curve right and read the new higher wage and employment off the graph. Then run the immigration scenario (labor supply shifts right, wage falls) and the falling-coal-price scenario (labor demand shifts left) the same way, each time cold-calling the reason before the drag.
- Reinforce with /graph-walkthroughs: step through the 'Output Price Rises, So Does Labor Demand' trace and the 'More Workers Enter, Wage Falls' trace so students see the MRP logic narrated step by step.
- Day 2 guided (monopsony): build this one on the whiteboard, since the factor-markets sandbox is a competitive labor market only and no interactive monopsony widget exists on the site. Draw the labor supply curve, then hand-draw MFC above it and explain the gap: to hire one more worker the monopsonist must raise the wage for everyone, so marginal factor cost sits above the wage. Mark hiring where MRP = MFC, then drop straight down to the SUPPLY curve to read the wage. Cold-call: 'Is this wage higher or lower than the competitive wage, and by construction why?'
Independent practice (40 min)
- Assign a mixed set from /practice/factor-markets: at least three MRP calculation items and three shift-prediction items.
- Give one hand-drawn task: draw a correctly labeled competitive labor market, then a monopsony market beside it, and annotate where the wage is read on each.
- Early finishers attempt one more /frq-practice/draw factor scenario of their choice and write the one-sentence reason for the shift.
Exit ticket
- Item 1: a firm sells output at 20 dollars; the 4th worker's marginal product is 6 units. Students compute that worker's MRP.
- Item 2: in one sentence, why does a monopsonist pay a wage below the competitive wage?
- Grade for 2 points: MRP = 120, and any correct mention that MFC exceeds the wage so the firm restricts hiring.
Homework
- Read the Monopsony section of /micro/factor-markets and write two sentences comparing the wage and employment level under monopsony versus a competitive labor market.
- Complete the full 6-card factor-markets review on /flashcards (derived demand, marginal revenue product, the profit-maximizing hiring rule, monopsony, the least-cost rule, and economic rent).
Differentiation
- Give struggling students a pre-formatted MRP table with the MP column filled in so they only compute MRP and compare to the wage.
- Stretch: ask advanced students to add a binding minimum wage above the monopsony wage and explain why it can raise BOTH the wage and employment, the counterintuitive monopsony result.
- For students who reverse the shift direction, provide a two-column reference card: output-price and productivity changes move DEMAND, worker-count and migration changes move SUPPLY.
Misconceptions to head off
- Wrong: a higher output price shifts labor supply. Correction: it shifts labor DEMAND, because output price is a component of MRP (MRP = MP x price).
- Wrong: in a monopsony the wage is read where MRP meets MFC. Correction: hire where MRP = MFC, but read the wage down on the labor SUPPLY curve, which is lower.
- Wrong: labor demand and labor supply are two views of the same schedule. Correction: they are independent; demand comes from firms' MRP, supply comes from workers' willingness to work at each wage.
- Wrong: MRP is the same as marginal product. Correction: MRP is marginal product multiplied by the output price, a dollar value, not a physical quantity.
Teacher FAQ
- This is a small exam unit. Is three periods too much?
- Unit 5 is only 10 to 13 percent, but it is the unit students most often leave underprepared, and monopsony is genuinely a full period. If you are tight, compress Day 1 competitive labor and monopsony into two periods and move the independent drawing to homework.
- What must students already know?
- They need marginal product and diminishing returns from Unit 3 and comfort reading MR = MC style rules. Monopsony also echoes the monopoly logic of a marginal cost curve sitting above an average, so teaching it after Unit 4 helps.
- Do students have to memorize the least-cost rule for two inputs?
- The rule MPL/PL = MPK/PK appears in the CED. Introduce it briefly at the end of Day 2 as a parallel to utility maximization, but the exam weights MRP hiring and monopsony far more, so do not spend a full period on it.
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