We have seen that market power in product markets exists when firms have the ability to set the prices they charge, within the limits of the demand curve for their products Depending on the factor supply curve, firms may also have some power to set prices they pay in factor markets A firm can set price in a factor market if, instead of a market-determined price, it faces an upward-sloping supply curve for the factor This creates a fundamental difference between price-taking and price-setting firms in factor markets A price-taking firm can hire any amount of the factor at the market price; it faces a horizontal supply curve for the factor at the market-determined price, as shown in Panel (a) of Figure 14.1 "Factor Market Price Takers and Price Setters" A price-setting firm faces an upward-sloping supply curve such as S in Panel (b) It obtains Q1 units of the factor when it sets the price P1 To obtain a larger quantity, such as Q2, it must offer a higher price, P2 Figure 14.1 Factor Market Price Takers and Price Setters A price-taking firm faces the market-determined price P for the factor in Panel (a) and can purchase any quantity it wants at that price A Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 737