AP_Krugman_Textbook

seen a small town where one firm, such as a meatpacking company or a lumber mill,

hires most of the labor—that’s an example of a monopsony. Since the firm already hires

most of the available labor in the town, if it wants to hire more workers it has to offer

higher wages to attract them. The higher wages go to all workers, not just the workers

hired last. Therefore, the additional cost of hiring an additional worker (MFCL) is higher

than the wage: it is the wage plus the raises paid to all workers. The calculation of

MFCLis shown in Table 71.2.

702 section 13 Factor Markets

Marginal Factor Cost of Labor with Imperfect Competition in the Labor Market

Quantity of Labor Wage Total Labor Cost Marginal Factor Cost of Labor

(L)(W)(L  W)(MFCL)

table71.2

$6

8

10

12

14

$0

6

14

24

36

50

0 1 2 3 4 5

$0

6

7

8

9

10

The fact that a firm in an imperfectly competitive labor market must raise the

wage to hire more workers means that theMFCLcurve is abovethe labor supply

curve, as shown in Figure 71.5. The explanation for this is similar to the explanation

for why the monopolist’s marginal revenue curve is below the demand curve. To sell

one more, the monopolist has to lower the price, so the additional revenue is the

price minus the losses on the units that would otherwise sell at the higher price.

figure 71.5

Supply of Labor and Marginal

Factor Cost in an Imperfectly

Competitive Market

The marginal factor cost of labor curve is above

the market labor supply curve because, to hire

more workers in an imperfectly competitive labor

market (such as a monopsony), the firm must raise

the wage and pay everyone more. This makes the

additional cost of hiring another worker higher

than the wage rate.

Market labor

supply curve

Marginal factor

cost of labor

Wage

rate,

MFCL

Quantity of labor

(workers)