Page 744 - Krugmans Economics for AP Text Book_Neat

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
MFCL is shown in Table 71.2.

table 71.2

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)
0 $0 $0
$6
1 6 6
8
2 7 14
10
3 8 24
12
4 9 36
14
5 10 50

The fact that a firm in an imperfectly competitive labor market must raise the
wage to hire more workers means that the MFCL curve is above the 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 Wage
rate, Marginal factor
Factor Cost in an Imperfectly MFCL cost of labor Market labor
Competitive Market supply curve
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.

Quantity of labor
(workers)

702 section 13 Factor Markets