AP_Krugman_Textbook

module 71 The Market for Labor 703

Section 13 Factor Markets
Here, to hire an additional worker, the monopolist has to raise the wage, so the mar-
ginal factor cost is the wage plus the wage increase for those workers who could oth-
erwise be hired at the lower wage.

Equilibrium in the Imperfectly Competitive

Labor Market

In a perfectly competitive labor market, firms hire labor until the value of the marginal
product of labor equals the market wage. With imperfect competition in a factor mar-
ket, a firm will hire additional workers until the marginal revenue product of labor
equals the marginal factor cost of labor. Note that the marginal revenue product of
labor for a perfectly competitive firm is the same as the value of the marginal product
of labor and that the marginal factor cost of labor for a perfectly competitive firm is the
market wage. The terms marginal revenue productand marginal factor costare generally ap-
plicable to the analysis of any market structure. The terms we used previously, value of
the marginal productand wage,refer to the specific cases of perfect competition in the
product market and labor market respectively. Thus, we can generalize and say that
every firm hires workers up to the point at which the marginal revenue product of
labor equals the marginal factor cost of labor:

(71-2) Hire workers until MRPL=MFCL

Equilibrium in the labor market with imperfect competition is shown in Figure
71.6. Once an imperfectly competitive firm has determined the optimal number of
workers to hire, L,it finds the wage necessary to hire that number of workers by start-
ing at the point on the labor supply curve above the optimal number of workers, and
looking straight to the left to see the wage level at that point, W.
Let’s put the information we just learned together, again referring to Figure 71.6:
The labor demand curve is the marginal revenue product curve. In an imperfectly
competitive labor market, the firm must offer a higher wage to hire more workers, so

figure 71.6

Equilibrium in the Labor Market

with Imperfect Competition

The equilibrium quantity of labor is found where

the marginal revenue product of labor equals the

marginal factor cost, at L*. The equilibrium wage,

W*, is found on the vertical axis at the height of

the market supply curve directly above L*.

Market labor

supply curve

Market labor

demand curve,

MRPL

Marginal factor

cost of labor

Wage

rate,

MFCL,

MRPL

Quantity of labor

(workers)

L*

Equilibrium

employment

W*