AP_Krugman_Textbook

that with perfect competition in the labor market, the additional cost of hiring another
worker (the MFCL) is always equal to the market wage, and the labor supply curve faced
by an individual firm is horizontal, as shown in Figure 71.4.
The labor supply curve faced by a firm is very different in a labor market character-
ized by imperfect competition: it is upward sloping and the marginal factor cost is
above the market wage. Unlike a perfect competitor that is small and cannot affect the
market, a firm in an imperfectly competitive labor market is large enough to affect the
market wage. For example, a labor market in which there is only one firm hiring labor
is called a monopsony.A monopsonistis the single buyer of a factor. Perhaps you’ve

module 71 The Market for Labor 701

Section 13 Factor Markets

figure 71.3

Firm Labor Demand with

Imperfect Competition

A firm’s labor demand curve is the marginal rev-

enue product of labor curve, which differs from the

value of the marginal product of labor curve when

there is imperfect competition in the product mar-

ket (as with a monopoly, for example). With perfect

competition, the marginal revenue product of labor

(MPL ×MR) and the value of the marginal product

of labor (MPL ×P) are the same because MR =P.

Labor demand

curve, MRPL

Wage

rate,

MRPL

Quantity of labor

(workers)

figure 71.4

Firm Labor Supply in a Perfectly

Competitive Labor Market

In a perfectly competitive labor market, the labor

supply curve faced by an individual firm is horizon-

tal at the market equilibrium wage because the

firm is so small relative to the market that it can

hire all the labor that it wants at the market wage.

For this reason, the labor supply curve for a firm in

a perfectly competitive labor market is equivalent

to the marginal factor cost of labor curve.

Firm labor

supply curve,

Marginal

factor cost

of labor

Wage

rate,

MFCL

Quantity of labor

(workers)

W*

Equilibrium

market wage

A monopsonistis a single buyer in a factor

market. A market in which there is a

monopsonist is a monopsony.