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Unit 5 factor terms, from your own notes
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Factor demand is derived, and the exam wants that word
No firm wants workers for their own sake; it wants what they produce, so demand for labour rises and falls with the product's market. Derived demand is the term, and scenario questions test it directly: a boom in the product raises the factor's demand curve, with the causation running through the product's price.
The hiring rule is one comparison, repeated per worker
Each additional worker adds marginal product, which sells for revenue; that marginal revenue product falls as diminishing returns bite. Hire while MRP exceeds the wage and stop where they meet. The downward sloping part of the MRP curve is the firm's labour demand curve, which is the sentence the conceptual questions want.
The MRP table is the free response staple, so drill the mechanics
The table gives workers and total product; you compute marginal product, multiply by output price for MRP, and compare each row against the wage. The last worker whose MRP clears the wage sets employment. In competition the output price stays fixed down the table; when the firm has product market power, price falls with quantity and MRP drops faster.
Monopsony is the single buyer, and its logic mirrors monopoly
A monopsony faces the whole upward sloping labour supply, so hiring one more worker raises the wage for everyone, and the marginal cost of labour climbs above the supply curve. It hires where MRP meets that marginal cost and pays the lower supply wage at that quantity: fewer workers, lower wage, the monopoly result reflected in a mirror.
The least cost rule balances inputs per unit of money
With two inputs, the efficient mix equalises marginal product per unit of money across them: when labour's ratio beats capital's, buy more labour until diminishing returns level the two. Questions hand you the four numbers and ask which input to expand, and dividing before comparing is the entire method. It is the consumer's utility rule wearing a producer's clothes.
What to photograph for Factor Markets
Your MRP tables and monopsony graphs. Related: Unit 4, photo to quiz and pricing.
Sources used on this page
- College Board, AP Microeconomics
- Derived demand
- Marginal revenue productivity theory of wages
- Monopsony
- Labour economics
- Active recall
- Spaced repetition
- Testing effect
- Forgetting curve
- Generation effect
- Judgment of learning
- Metacognition
- Desirable difficulty
- Distributed practice
- Formative assessment
- Flashcard
- Cloze test
- Multiple choice
- Test (assessment)
- Educational assessment
- Advanced Placement
- Curriculum
- Study skills
- Study guide
- Note-taking
- Overlearning
- Instructional scaffolding
- Item analysis
- Mastery learning
| Row computation | In competition | With market power |
|---|---|---|
| Marginal product | Total product differences | Same arithmetic |
| MRP | MP times fixed price | MP times falling price |
| Hiring decision | Last MRP above the wage | Same rule, steeper curve |
| Labour supply to the firm | Flat at market wage | Upward, monopsony's curve |
| Wage paid | The market wage | Below competitive, off supply |
| Employment verdict | Where MRP meets wage | Where MRP meets marginal labour cost |
What does AP Micro Unit 5 cover?
Factor markets: derived demand, marginal revenue product, competitive labour markets, monopsony and the least cost rule.
What is marginal revenue product?
The extra revenue one more worker brings: marginal product times output price in competition, and it falls as returns diminish.
When does a firm stop hiring?
Where the next worker's MRP no longer clears the wage. The last profitable hire sets employment.
Why does a monopsony pay less?
It faces the whole supply curve, so marginal labour cost climbs above it; hiring stops earlier and the wage reads off supply, below the competitive level.
What is the least cost rule?
Equalise marginal product per unit of money across inputs; expand whichever input currently gives more product per unit of spending.
Can I build questions from my own Unit 5 notes?
Yes. The questions follow the upload: photograph these pages or attach the PDF, and nothing outside them enters the set.
Last updated: 2026-08-15