The same supply-and-demand logic, applied to labor and other resources. Why demand for workers is derived from demand for output, how a firm decides its last profitable hire, and what changes when one employer dominates the market.
Six ways to master Unit 5 — pick whichever fits how you like to study.
Four topics from the College Board CED, in order.
Unit 5 flips the market around. In Units 2–4 firms were sellers of output and households were buyers. Here firms are buyers of resources — labor, land, capital — and households are the sellers. The supply-and-demand machinery is identical; only the players swap sides.
The organizing idea is derived demand: no firm wants workers for their own sake. It hires labor because labor produces output that can be sold. That makes the value of a worker equal to marginal revenue product — the extra output the worker makes, multiplied by the revenue each unit brings in. A firm keeps hiring while MRP exceeds the cost of the hire, which in a competitive labor market is simply the wage.
At roughly 10–13% of the exam across about 10–12 class periods, this is one of the smaller units, but it is heavily formulaic and therefore very scoreable. Know MRP = MP × MR (or × P in perfect competition), the least-cost rule, and above all the monopsony graph, where MFC lies above supply and the wage is read off the supply curve rather than off MFC.