first rule of labor markets an employer will never pay a worker more than the value of the worker's marginal

productivity to the firm

monopsony a labor market where there is only one employer

perfectly competitive labor market a labor market where neither suppliers of labor nor demanders of labor

have any market power; thus, an employer can hire all the workers they would like at the going market

wage

Key Concepts and Summary

14.1 The Theory of Labor Markets

A firm demands labor because of the value of the labor’s marginal productivity. For a firm operating in a

perfectly competitive output market, this will be the value of the marginal product, which we define as the

marginal product of labor multiplied by the firm’s output price. For a firm which is not perfectly competitive,

the appropriate concept is the marginal revenue product, which we define as the marginal product of labor
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