In a perfectly competitive labor market, a firm will continue to hire additional workers as long as the marginal revenue product of labor is greater than the marginal factor cost, indicating that hiring more workers will always lead to increased profits.

In a perfectly competitive labor market, firms make decisions about hiring workers based on how much additional money those workers can earn for the company, which is called the marginal revenue product of labor (MRP). If the MRP is greater than the cost of hiring another worker, known as the marginal factor cost (MFC), then the firm will likely hire that worker because it means more profits. For example, if hiring an additional worker costs $15 but that worker brings in an extra $20 in revenue, the firm benefits by $5. This process continues until the cost of hiring an additional worker equals the value that worker adds to the company, at which point the firm stops hiring more workers. By following this rule, firms maximize their profits while ensuring they are using their resources efficiently.