A firm's labor demand curve is also its marginal revenue product curve. For both the perfectly competitive firm and the output price maker, the labor demand curve slopes downwards
However, there is a difference in the reasons why the labor demand curve slopes downwards. What is this difference?
A perfectly competitive firm can sell all its output at a constant price. This means that its marginal revenue product falls as additional units of labor are hired only because of the law of diminishing returns. This law states that in the presence of a fixed factor, ultimately each additional unit of labor will be less productive than previous units. A firm with market power has to lower its selling price to sell more, so its marginal revenue product falls as additional units of labor are hired because of diminishing returns and a falling marginal revenue.
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