5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
In a perfectly competitive labor market the firm is a wage taker: its marginal factor cost equals the market wage, so it hires until MRP = MFC = wage.
The market's labor supply and labor demand set the wage; each individual firm hires such a tiny share that it takes the wage as given. On the side-by-side graph, the firm faces a horizontal (perfectly elastic) labor supply at the market wage, so its marginal factor cost (MFC, also called marginal resource cost) is constant and equal to the wage.
The hiring rule mirrors the output rule: hire another worker whenever the extra revenue exceeds the extra cost, and stop where MRP = MFC. In a competitive factor market that means hiring until MRP = wage — beyond that point each worker adds more cost than revenue.
When a firm combines several inputs, the least-cost rule applies: employ inputs so the marginal product per dollar is equal across them, MPL ÷ wage = MPK ÷ rental rate. If labor gives more output per dollar than capital, shift spending toward labor until the ratios equalize.
Key terms for 5.3
Drag the curves yourself — the fastest way to make 5.3 stick.
Drawing an upward-sloping labor supply curve for an individual competitive firm. A wage taker faces a horizontal supply at the market wage — the upward-sloping curve belongs on the market graph (or to a monopsonist).
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