Teaching Unit V- Factor Markets. The fifth unit of instruction entails the content areas of Fac-
tor Markets as detailed in the AP* Economics Course Description1 (Content Area III, A-D) and
includes topics of Market Failure and the Role of Government (Content Area IV, D)
I. Plan NOTE: Chapters and pages in (parenthesis) denote reference for the split text in Micro
Economics
Teaching Materials
Instructors Manual Text readings
The Supply and Demand for Productive
Resources,
Chapter 25 (12)
Chapter 25, (12), The Supply and Demand
for Productive Resources
Chapter 26
Earnings, Productivity, and the Job Mar-
ket (13)
Chapter 26, (13), Earnings, Productivity, and
the Job Market
Special Topic 10 (9)
Do Labor Unions Increase the Wages of
Workers?
Investment, the Capital Market, and the
Wealth of Nations,
Chapter 27 (14)
Chapter 27,(14), Investment, the Capital
Market and the Wealth of Nations
Income Inequality and Poverty
Chapter 28 (15)
Chapter 28, (15), Income Inequality and Pov-
erty
Key instructional objectives: Students do the following
2. explain the concept of derived demand.
4. construct a short-run demand schedule for a resource.
6. explain the relationship between marginal revenue product (MRP )and the demand for an in-
put.
8. explain and apply the rule for finding least cost combination.
10. explain how wage rate is determined.
11. determine wage rates in a competitive and a monopsonist labor market
1
13. explain how unions can change or influence wage rates and employment levels
15. draw and describe the information provided by a Lorenz curve
17. explain the official definition of poverty
19. summarize theories underlying arguments for redistribution of income
20. define the major government redistribution programs and the groups which they are to benefit
Computational & graphing : Students must complete these tasks
Graph and explain the demand and supply of the labor resource
Graph how equilibrium wage rates are determined in a competitive and in an imperfect
market (monopsony)
Construct and interpret Lorenz curves
Read and interpret Gini coefficients
Formative Signals: The following content and skill areas have been identified as areas of weak-
ness for students based upon past objective and free response examinations.
Objective Formative Signals: Based upon
the released objective AP* Micro Economics
examinations, less than 50% of the students
have been able to correctly answer questions
to
following
Free response Formative Signals: Past stu–
dents have found these to be problematic areas
use least cost hiring rule for resources
recognize characteristics of competi-
tive labor markets
explain results of product price change
on marginal revenue product curve
Part 3/Unit V 385
understand and apply the least cost
rule given novel data
explain the concept of derived demand
recognize the segment of the down-
understand reasons for shift in demand
for an input in response to a change in
product price
explain consequences of shift in the
II. Teach
Recommended sequence of instruction: Teach factor market concepts in this sequence
Chapter 25 (12)
The Supply and Demand for Productive Resources
1. HUMAN AND NON-HUMAN RESOURCES, P. 500 (P. 232)
Describe composition of the markets for labor, capital, and land.
Factors of production
2. THE DEMAND FOR RESOURCES, P. 500 (P. 232)
Explain how the value of marginal product determines the demand for a factor of production.
Explain concept of derived demand and derivation of the marginal revenue product( MRP)
(MRP=MPP * Px (of good))
3. MARGINAL PRODUCTIVITY AND THE FIRM’S HIRING DECISION, P. 504 (P. 236)
386 Part 3/Unit V
4. THE SUPPLY OF RESORUCES, P. 508 (P. 240)
5. SUPPLY, DEMAND, AND RESOURCE PRICES, P. 511 (243)
Explain how wage rates and employment are determined.
Supply of labor
Chapter 26 (13)
Earnings, Productivity, and the Job Market
1. WHY DO EARNINGS DIFFER? P. 516 (P. 248)
2. THE ECONOMICS OF EMPLOYMENT DISCRIMINATION, P. 523 (P. 255)
3. LINK BETWEEN PRODUCTIVTY AND EARNINGS, P. 525 (257)
Special Topic 10 (9)
Do Labor Unions Increase the Wages of Workers?
1. UNION MEMBERSHIP AS A SHARE OF THE WORKFORCE, P. 670 (P. 414)
2. HOW DO UNIONS INFLUENCE WAGES?, P. 673 (P. 417)
3. WHAT GIVES A UNION STRENGTH?, P. 675 (P. 419)
4. THE WAGES OF UNION AND NONUNION EMPLOYEES, P. 677 (P. 421)
5. THE IMPACT OF UNIONS ON THE WAGES OF ALL WORKERS, P. 678 (P. 422)
Chapter 28 (15)
Income Inequality and Poverty
1. HOW MUCH NCOME INEQUALITY EXITS IN THE UNITED STATES? P. 549 (P. 281)
2. INCOME MOBILITY AND INEQUALITY IN ECONOMIC STATUS, P. 554 (P. 286)
3. POVERTY IN THE UNITED STATES, P. 556 (P. 288)
4. INCOME INEQUALITY: SOME CONCLUDING THOUGHTS, P. 560 (P. 292)
Explain the effects of taxes, Social Security, and welfare programs on economic inequality
Income redistribution
Key conceptual questions: Students demonstrate their understanding of the material by answer-
ing the following key conceptual questions
1. How do principles of choice apply to the decision to buy resources?
2. What factors affect demand and supply of resources?
3. How do the conditions of competition in resource markets promote allocative effi-
ciency?
4. What factors promote efficiency of resources?
5. How do markets for capital resources differ from markets of other resources?
6. What determines the demand for a factor of production in a competitive firm and in a
monopolistic firm?
7. List and explain three factors that would increase the demand for a resource.
8. If a firm wants to maximize profits, how much of each factor should be hired or pur-
chased?
9. How is an industry wage rate determined?
11. What is rent?
12. How does rent differ from other human resources in the determination of its price and
quantity?
13. What is a Lorenz curve, and what does it measure?
14. What has happened to the distribution of income in the United States?
15. What is the difference between income and wealth?
16. Why do people earn different incomes?
17. How do unions improve wages and employment among members?
III. Assess: Suggestions for determining what and how much students have learned.
Past Objective AP* Test: Based upon released objective examinations, the students have been
required to demonstrate the following content related to this unit of instruction.
Task and behavior related to the characteristics of the demand for a (labor) resource
calculate the marginal productivity (MP) of workers from novel data
understand the composition of the demand curve for labor – marginal revenue product,
(MRP)
define marginal revenue product
explain the concept of derived demand
Task and behavior related to the supply of resources
understand factors causing determination of labor supply curve
predicts impact of new workers in the market on the wage rate and number hired in a per-
fectly competitive labor market
Task and behavior related to the characteristics of purchasing (hiring) resources.
determine number of workers to hire
Part 3/Unit V 389
understand profit maximizing hiring rule for a firm
understand and apply least cost rule given novel data
understand the profit maximizing hiring rule of laborers (MRC=MRP)
use least cost hiring rule for resources
determine number of people to be hired given output, price of product and wage rate
recognize conditions for least cost combination of factors of production
Task and behavior related income distribution
list reasons for antitrust legislation
understand conditions for allocative efficiency
Past Free Response AP* Questions: Based upon released free response questions, the students
have been required to demonstrate the following content related to this unit of instruction.
1991 and 1994, recognizes and identify relationship between MRC and MRP
1994, analyze outcome given new entry of new workers in labor market combined with a
390 Part 3/Unit V
2000, given novel data, determine number of workers a firm should hire
2001, given production data, compute marginal productivity, identify and explain the law
of diminishing returns; determine the number of laborers to be hired at a given wage rate
2002, using side-by-side graphs graph (explain) how a monopolist who hires in a competi-
tive labor market will determine wage rate and number of workers hired.
Key instructional objectives: Students do the following
1. distinguish between nominal and real interest rate
3. calculate present value and relative profitability of an investment or an asset portfolio
Computational & graphing : Students must complete these tasks
Graph the supply and demand for loanable funds
Calculate the present value of future income given different interest rates and years.
Part 3/Unit V 391
Objective Formative Signals: Based upon
the released objective AP* Micro Economics
Free response Formative Signals: To date no
questions related to investment demand, pre-
II. Teach
Recommended sequence of instruction: Teach factor market concepts in this sequence
Chapter 27 (14)
Investment, the Capital Market and the Wealth of Nations
(NOTE: Topics 1, 2, and 3, concerning the loanable fund market will also be necessary for under-
standing the content contained in Money and Banking, and Monetary Economic Policy, covered
in AP* Macro Economics)
1. WHY PEOPLE INVEST, P. 532 (P. 264)
2. INTEREST RATES, P. 533 (P. 265)
Explain how interest rates are determined in the loanable fund market.
3. THE PRESENT VALUE OF FUTURE INCOME AND COSTS P. 536 (P. 268)
4. PRESENT VALUE, PROFITABILITY, AND INVESTMENT P. 538 (P. 270)
Explain how the amount of investment is determined by the firm’s comparison of benefits vs. cost.
5. INVESTING IN HUMAN CAPITAL, P. 540 (P. 272)
6. UNCERTAINITY, ENTREPRENUERSHIP, AND PROFIT, P. 541 (P. 273)
392 Part 3/Unit V
7. WHY IS THE CAPITAL MARKET SO IMPORTANT? P. 544 (P. 276)
Key conceptual questions: Students demonstrate their understanding of the material by answer-
ing the following key conceptual questions
1. What factors cause a change in the supply of loanable funds? What factors cause a change in
the quantity supplied of investment funds?
2. What determines the equilibrium financial market interest rate?
3. What factors cause a change in the demand for investment funds? What factors cause a change
in the quantity demanded of investment funds?
4. How is the present value of future income calculated?
5. How does the process of discounting assist firms in deciding the level of investment?
6. How do interest rates affect demand for capital resources?
Sample Questions for Unit V
1. The following chart indicates the reductions in total losses due to theft if a jewelry store hires
additional security guards.
Number Dollar Value of
of Guards Thefts Prevented
1 150
2 250
3 340
4 420
5 490
6 540
If the security guards can be hired for $75 per day, how many guards should the shop hire?
(A) 2
(B) 3
(C) 4
(D) 5
(E) 6
2. Which of the following best illustrates the concept of derived demand ?
(A) A decrease in the price of glass causes the demand for plastic to decrease.
(B) An increase in the demand for bread leads to an increase in the demand for flour.
(C) A decrease in the price of air travel leads to an increase in the quantity demanded of air
travel.
(D) An increase in the demand for peanut butter leads to an increase in the demand for jelly.
(E) An increase in consumer income results in an increase in demand.
3. The demand for a factor of production will be more inelastic,
(A) when the cost of the factor is small relative to the total cost of the product.
(B) the more elastic the demand for the final product.
(C) the easier it is to substitute other resources for the factor.
(D) the more elastic the supply of products produced with the resource.
(E) the more inelastic the supply for the factor of production.
4. The marginal revenue product of a resource
(A) is defined as the marginal product of the resource multiplied by the resource price.
(B) simply means that a firm should add to its capital stock as long as competition requires it.
(C) equals the extra output produced by an additional unit of the resource multiplied by the
marginal revenue per unit of that output.
(D) equals the average product of the resource multiplied by the cost of hiring an additional
(marginal) unit of the resource.
(E) equals the marginal revenue of the output multiplied by the number of products pro-
duced.
5. A profit-maximizing firm will consider which of the following principles in deciding the num-
ber of workers to hire?
(I) Hire workers as long as Marginal Revenue Product (MRP) is greater than the wage rate.
(II) Hire workers until the point of where marginal productivity (MP) falls.
(III) Hire workers until the Marginal Revenue Product (MRP) of a resource is equal to the
price of the product.
(A) I and II
(B) I and III
(C) II and III
(D) I only
(E) III only
6. The following schedule shows how many jars of Julie s Jam can be produced daily with vari-
ous amounts of labor. (Assume that the jam is sold in a competitive price-taker market.)
Workers per Day 1 2 3 4 5 6 7 8
Total Output per Day 11 23 36 47 56 63 69 74
If Julie must pay each worker $65 per day, and she can sell her jam for $10 per jar, how many
workers should she hire if she wants to maximize profits?
(A) 3
(B) 4
(C) 5
(D) 6
(E) 8
7. The supply of a resource, such as oil, is likely to be
(A) equally elastic in both the short and long run.
(B) more elastic in the long run than in the short run.
(C) more elastic in the short run than in the long run.
(D) determined by the demand for the resource.
(E) elastic when the demand is elastic and inelastic when the demand is inelastic.
8. If a firm used only two factors of production, labor (L) and capital (K), which of the following
conditions would be present if the firm was minimizing its cost of production?
(A) MPL / PL = MPK / PK
(B) MPL x PL = MPK x PK
(C) MRPL / PL = MRPK / PK
(D) MRPL = MRPK
(E) MPL = MPK
Quantity of Workers Total Output Product Price
0 0 $5
1 10 $5
2 25 $5
3 45 $5
4 60 $5
5 70 $5
6 70 $5
7 65 $5
9. Based on the information in the table above, what is the Marginal Revenue Product of the fifth
worker?
(A) 10
(B) 50
(C) 70
(D) 210
(E) 350
10. Based on the information in the table above, at what point does diminishing returns to labor
set in?
(A) with the addition of the third worker
(B) with the addition of the fourth worker
(C) with the addition of the fifth worker
(D) with the addition of the sixth worker
(E) with the addition of the seventh worker
11. A graph that shows the distribution of personal income is a(n)
(A) supply curve.
(B) production function.
(C) marginal cost curve.
(D) Lorenz curve.
(E) Laffer curve.
Answers to Multiple-Choice Sample Questions for Micro Unit V
Part 3/Unit V 395
Sample Free-Response Question for Micro Unit V
1. A firm finds that it can hire all of the workers it wants for $50 per day and can sell all of its
output at $10 per unit. Using the information in the table below answer the following ques-
tions:
Workers Total Output
0 0
1 10
2 25
3 45
4 60
5 70
6 70
7 65
(A) State and explain in what market this firm sells its output.
(B) State and explain in what market this firm hires labor.
(C) What is the marginal physical product of the third worker?
(D) At what point (if any) do diminishing returns set in? Explain.
(E) What is the marginal revenue product of the fourth worker?
(F) What is the profit-maximizing number of workers for this firm to hire? Explain.
Answers to Free-Response Sample Question for Micro Unit V
This question would be graded using a 10 point rubric.
1. (A) One point for identifying perfectly competitive