AP_Krugman_Textbook

700 section 13 Factor Markets

When the Product Market Is Not Perfectly Competitive

When the product market is perfectly competitive, the wage rate is equal to the value of

the marginal product of labor at equilibrium. In other market structures this is not the

case. For example, in a monopoly, the demand curve for the product faced by the mon -

opolist slopes downward. This means that to sell an additional unit of output, the

monopolist must lower the price. As a result, the additional revenue received from sell-

ing one more unit for a monopolist is not simply the price like it was for a perfect com-

petitor. It is less than the price by the amount of the price effectexplained previously—the

decreased revenue on units that could have been sold at a higher price if the price had-

n’t been lowered to sell another unit. How does this affect hiring? To determine its de-

mand for workers, the monopolist must multiply the marginal product of labor by the

marginal revenuereceived from selling the additional output. This is called the mar-

ginal revenue product of labor orMRPL.

(71-1) MRPL=MPL×MR

Table 71.1 shows the calculation of a firm’s marginal revenue product of labor.

Marginal Revenue Product of Labor with Imperfect Competition in the Product Market

Quantity of Quantity of Marginal Product Total Marginal Revenue

Labor Output Product of Price Revenue Marginal Revenue Product of labor

(L)(Q) labor (MPL)(P)(TR)PQ (MR) ΔTR /ΔQ (MRPL) MPLMR

table71.1

$10.00

9.80

9.60

9.40

9.20

$0.00

100.00

186.20

259.20

319.60

368.00

$100.00

86.20

73.00

60.40

48.40

$10.00

9.58

9.13

8.63

8.07

10

9

8

7

6

0 1 2 3 4 5

0

10

19

27

34

40

For a perfectly competitive firm, marginal revenue equals price, so VMPLandMRPL

are equivalent. The two concepts measure the same thing: the value to the firm of hir-

ing an additional worker. The term MRPLis a more general term that applies to firms

in both perfect competition and imperfect competition. The general rule is that a profit-

maximizing firm in an imperfectly competitive product market employs each factor of production

up to the point at which the marginal revenue product of the last unit of the factor employed is equal

to that factor’s cost.

In the case of a firm operating in an imperfectly competitive product market, the de-

mand curve for a factor is the marginal revenue product curve, as shown in Figure 71.3.

When the Labor Market Is Not Perfectly Competitive

There are also important differences when considering an imperfectly competitive

labormarket rather than a perfectly competitive labor market. One major difference is

themarginal factor cost.The marginal factor cost is the additional cost of hiring one

more unit of a factor of production. For example, the marginal factor cost of labor

(MFCL)is the additional cost of hiring one more unit of labor. With perfect competi-

tion in the labor market, each firm is so small that it can hire as much labor as it wants

at the market wage. The firm’s hiring decision does not affect the market. This means

The demand curve for labor for a firm
operating in an imperfectly competitive
product market is the marginal revenue
product of labor curve. The marginal
revenue product of labor (MRPL)is
equal to the marginal product of labor times
the marginal revenue received from selling
the additional output. The marginal revenue
product of land and the marginal revenue
product of capital are equivalent concepts.

Themarginal factor cost of labor
(MFCL)is the additional cost of hiring an
additional worker. The marginal factor cost of
land and the marginal factor cost of capital
are equivalent concepts.