However, because the marginal revenue product curve is negatively sloped due to the law of diminishing marginal returns, so too is the firm's factor demand curve. And because all firms in a perfectly competitive industry have negatively-sloped marginal revenue product curves, the factor demand curve for the entire industry is also negatively sloped.

Insight Into Factor Demand

A perfectly competitive firm hires the quantity of input that equates marginal factor cost, which is equal to factor price, and marginal revenue product. The profit-maximizing choices of input at alternative factor prices generates the perfectly competitive firm's factor demand curve.

Consider three key points:

1. A profit-maximizing firm hires the quantity of input that equates marginal factor cost and marginal revenue product (MFC = MRP).


2. A perfectly competitive firm is characterized by the equality between factor price and marginal factor cost (FP = MFC).


3. The law of diminishing marginal returns gives the marginal revenue product curve a negative slope.

• An increase in the factor price, moves the profit-maximizing quantity to a higher point on the negatively-sloped marginal revenue product curve, and a smaller quantity of employment.


• A decrease in the factor price, moves the profit-maximizing quantity to a lower point on the negatively-sloped marginal revenue product curve, and a larger quantity of employment.

Working a Graph

Employment Options

This graph displays Waldo's Taco World's marginal revenue product curve for employment of taco-making workers. This increases for the first two workers, indicating increasing marginal revenue product, but more importantly, decreases for additional workers, indicating decreasing marginal revenue product and the law of diminishing marginal returns.

As a profit-maximizing firm, Waldo's Taco World hires the quantity of workers that equates the going factor price with marginal revenue product. Waldo's Taco World's factor demand response to changing factor prices can be observed by... well... by changing factor prices then noting Waldo's Taco World's factor demand response.

One place to begin is with a factor price of say $30. A click of the [$30 Wage] button reveals that Waldo's Taco World maximizes profit by hiring 5 workers. The factor quantity demanded by Waldo's Taco World at a $30 Wage factor price is thus 5 workers. This factor price/quantity demanded combination is one point on Waldo's Taco World's factor demand curve. What might Waldo's Taco World do if it faces different factor prices.

• A Higher Price: Consider a higher factor price. A click of the [$40 Wage] button reveals that Waldo's Taco World maximizes profit in this case by hiring 4 workers. This higher factor price induces Waldo's Taco World to decrease his quantity demanded from 5 to 4. How about a $50 factor price. A click of the [$50 Wage] button reveals that Waldo's Taco World maximizes profit by hiring only 3 workers. Once again, a higher factor price motivates Waldo's Taco World to decrease its quantity demanded.


• A Lower Price: What about a lower price? A click of the [$20 Wage] button shows that Waldo's Taco World maximizes profit by hiring 6 workers. This lower factor price motivates Waldo's Taco World to increase his quantity demanded. How about a $10 factor price. A click of the [$10 Wage] button reveals that Waldo's Taco World maximizes profit by hiring 7 workers. Once again, a lower factor price entices Waldo's Taco World to increase its quantity demanded.

• First, the vertical axis measures wage rather than marginal revenue product. This places focus on the factor price.


• Second, the positively sloped portion of the marginal revenue product curve disappears. This segment is not part of the factor demand curve.


• Third, the curve is labeled D rather than MRP.

Only Perfect Competition