Factor Markets

Name: AP Microeconomics Unit 5: Factor Markets
Availability: InStock

10–13% of the exam3 lessons · 41 min

What this unit covers

The topics below follow the published Micro course framework for Unit 5. This unit is worth 10–13% of the exam, so budget your time against that rather than against how long the unit takes to teach.

Derived demandLabor marketsMRPWage determination

Lessons in this unit

Derived Demand & Marginal Revenue Product14 min · 3 objectivesExplain why the demand for a factor of production is a derived demand · Calculate marginal revenue product and marginal resource cost · Apply the profit-maximizing hiring rule MRP = MRC
Competitive Labor Markets & Wage Determination14 min · 3 objectivesExplain how equilibrium wages are set in a competitive labor market · Identify the determinants that shift labor demand and labor supply · Relate the firm’s wage-taking behavior to the market wage
Monopsony & the Least-Cost Rule13 min · 3 objectivesExplain how a monopsony sets wages and employment below competitive levels · Distinguish marginal resource cost from the wage in a monopsony · Apply the least-cost combination rule for hiring multiple inputs

Formulas in Unit 5

Factor hiring

MRP = MP × MR (= MP × P in a competitive product market) · Hire until MRP = MRC

MRP is the extra revenue from one more unit of the factor; MRC is its extra cost. In a competitive labor market MRC equals the market wage.

Competitive labor market equilibrium

Market: labor demand (ΣMRP) = labor supply → sets wage · Firm: hires where MRP = wage (MRC)

The market sets the wage; the wage-taking firm faces a horizontal labor-supply curve at that wage and hires until MRP falls to it.

Least-cost and profit-max input rules

Least-cost: MPL / PL = MPK / PK · Profit-max: MRPL / PL = MRPK / PK = 1

Equalizing marginal product per dollar minimizes cost for a given output; hiring each input until MRP = its price maximizes profit and satisfies the least-cost rule too.

What examiners penalize here

The hiring rule **MRP = MRC** is the factor-market twin of the product-market rule MR = MC. In a competitive labor market, set **MRP = wage**. Always confirm whether the *product* market is competitive before using MRP = MP × P.
Free-response items often pair a **market** labor diagram (setting the wage) with a **firm** diagram (MRP = wage). Show the wage determined in the market, then carry that horizontal wage line to the firm’s MRP curve to find how many workers it hires.
For least-cost problems, compute **marginal product per dollar** (MP ÷ input price) for each input and shift toward the higher one until they equalize. Do not compare raw marginal products when input prices differ — always divide by price first.

Practice Micro

Our practice bank is drawn from across the whole course rather than filtered to one unit, which is closer to how the exam asks anyway — it will not tell you which unit a question is testing.

26 practice questionsEvery one with a written explanation FRQ trainerWritten answers scored against the rubric Micro study guideAll units, weights and score data in one place All 6 Micro unitsThe full course

Questions about this unit

How much of the AP Microeconomics exam is Unit 5?

Unit 5, Factor Markets, is worth 10–13% of the Micro multiple-choice section according to the published course framework. Across all 6 units that makes it a substantial share — heavier than an even split would give it.

What topics are covered in Micro Unit 5?

Factor Markets covers Derived demand, Labor markets, MRP and Wage determination.

How should I study Micro Unit 5?

Read the 3 lessons below first — about 40 minutes — then work practice questions on these topics. Finish with practice questions and read the explanation for every one you get right by elimination as well as the ones you miss.

All 6 units of AP Microeconomics

Unit names, topics and exam weights follow the published College Board course framework for AP Microeconomics. AP® is a trademark registered by the College Board, which does not endorse this site.