AP Micro Unit 5 Review: Factor Markets
AP Micro Unit 5 covers the markets for labor and other resources: marginal revenue product, factor demand, wage determination in competitive labor markets, and monopsony. It is 10–13% of the exam and the unit students most often leave underprepared.
What's in Unit 5
- 1Introduction to factor markets (derived demand)
- 2Changes in factor demand and factor supply
- 3Profit-maximizing behavior in perfectly competitive factor markets (MRP = MFC)
- 4Monopsonistic markets
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What to master for the exam
- Hire where MRP = MFC (wage, in a competitive labor market). MRP = MP × price of output.
- Remember factor demand is derived demand — it shifts when output demand, productivity, or output price changes.
- Draw the monopsony graph: MFC above supply, hire where MRP = MFC, pay the lower wage off the supply curve.
- Least-cost rule for two inputs: MPL/PL = MPK/PK.
AP Micro Unit 5: common questions
What is on AP Micro Unit 5?
Factor (resource) markets: derived demand, marginal revenue product and marginal factor cost, profit-maximizing hiring at MRP = MFC, shifts in factor demand and supply, wage determination, and monopsony. It is worth 10–13% of the AP Micro exam.
What is the difference between MRP and MFC?
MRP (marginal revenue product) is the extra revenue from hiring one more unit of a factor — marginal product times the price of the output. MFC (marginal factor cost) is the extra cost of hiring that unit — the wage in a competitive labor market. Firms hire up to the point where MRP = MFC.