Factor markets

This course is a part of AP®︎ Microeconomics, a 11-course Topic series from Khan Academy.

In this unit, we apply the concepts of supply and demand to markets for factors such as labor, capital, and land. We analyze the concept of derived demand, understand how a factor’s marginal product and the marginal revenue product affect the demand for the factor, and consider the role of factor prices in the allocation of scarce resources. By studying the determination of factor prices, we gain an understanding of how the market determines the distribution of income and the sources of income inequality in a market economy.

This course contains 4 segments:

Introduction to factor markets

Firms hire the factors of production, such as labor, in factor markets. In this lesson, learn the key terms and concepts used in the analysis of factor markets.

Changes in factor demand and supply

Constructing a demand curve for an individual firm by thinking about how much increment benefit they get from an incremental employee (marginal product of labor (MPL) and marginal product revenue (MPR). We later think about how we can add these "demand" curves to construct a "demand" curve for the market for labor in this industry.

Profit-maximizing behavior in perfectly competitive factor markets

In this lesson, we explore how a firm chooses the optimal, profit-maximizing choice of an input when the firm purchases factors of production in from perfectly competitive factor markets.

Monopsonistic markets

When a firm purchases factors of production in perfectly competitive factor markets, factors are paid their marginal revenue product. However, when a firm is the only buyer of a factor of production, then that factor is being exchanged in a monopsonistically competitive market. In this lesson, we explore the implications of a monopsonistically competitive factor market, specifically the market for labor, on the amount of the factor hired and the price paid for it relative to its marginal revenue product.