For a firm that hires factors in a perfectly competitive market, the factor supply curve that it faces is perfectly elastic at the going market price. In perfect competition, marginal factor cost, average factor cost, and factor price are all equal. Monopsony and other imperfectly competitive firms with some degree of control over the factor market face an upward-sloping factor supply curve. With imperfect competition, marginal factor cost is greater than average factor cost and factor price.

Factor Supply Curve

The exhibit to the right displays a typical factor supply curve. This particular curve is the supply for gourmet chefs in the greater Shady Valley metropolitan area. The number of chefs (labor) is measured on the horizontal axis and the wage paid per chef is measured on the vertical axis. This factor supply curve indicates that a $10 wage entices 2,000 chefs to supply their services, a $30 wage entices 4,000 chefs to supply their services, and a $50 wage entices 6,000 chefs to supply their services. The number of chefs willing and able to supply their productive services increases with the wage.

A notable feature of this factor supply curve is the positive slope. Gourmet chefs are willing and able to offer more labor at a higher wage. However, if they receive a lower wage, then they are willing and able to offer less labor. The primary reason for this direct relation between wage and quantity supplied is the opportunity cost of supplying their productive efforts.

The primary opportunity foregone to supply labor services is leisure activities. As more time is spent working, the opportunity cost of leisure increases. This can be seen by reversing the context of this labor-leisure tradeoff, focusing on the consumption of leisure. Like any good, the quantity demanded of leisure is inversely related to the price. If people consume more leisure, then they are willing to pay a lower price. If they consume less leisure, then they are willing to pay a higher price.

When people work more, then they consume less leisure. With less leisure consumed, the demand price of leisure is higher. This demand price of leisure is the opportunity cost of worker. As such, people generally need a higher wage when they supply a greater quantity of labor to compensate for the increasingly valuable leisure that is foregone.

Alternative Supply Curves

The standard positively-sloped factor supply curve, such as the one displayed here is one of three alternative factor supply curves that are worth a look. This particular curve, once again, is the market supply for gourmet chef labor services.

• Horizontal Supply: A second supply curve is one facing a firm that hires a factor in a perfectly competitive factor market. In this case, the firm has no control over the factor price, which is set by market forces at $30 per hour. The firm can hire as much of the factor as desired at the going market price. In this case, the factor supply curve is perfectly elastic. This alternative can be seen by clicking the [Horizontal Supply] button. This factor supply curve is also the firm's average factor cost curve and marginal factor cost curve.


• Vertical Supply: At the other extreme is a fixed factor supply. The quantity of land available within the political boundaries in the middle of a major city is one example. The quantity of any skilled labor, such as dentists or computer programmers, supplied over a relatively short time period, such as a week, offers another example. For these examples, the factor supply curve is perfectly inelastic. This alternative can be seen by clicking the [Vertical Supply] button.