As we saw in the subsection on Factor Prices, the wage rate for labor (and rental rate for capital) are determined by the intereaction of supply and demand. Individual firms will make decisions as if factor supply curves are horizontal (infinitely elastic) at the market wage or rental rate.

    This is similar to the situation we saw for perfectly competitive firms in output. In the graph shown, the firm's demand curve for the input, DF, is, as always the MRP of the input. From the point of view of the firm, the supply curve LS is horizontal at the market wage. Few firms hire enough of any factor to have an impact on the market price of a factor, so we can draw the supply curve this way for the firm. We'll consider exceptions to this in the subsection on Market Power

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