AP MICROECONOMICS UNIT #6 FACTOR MARKETS Lecture #4 Monopsony

MONOPSONY MODEL There is only a single employer that has huge buying power of a particular kind of labor The type of labor is relatively immobile, either geographically or because workers would have to acquire new skills The firm is a “wage maker” in that the wage rate it must pay varies directly with the number of workers it employs

MONOPSONY MODEL The firm’s labor supply curve will be upward sloping Since the firm is the market, the market supply curve is also upward sloping The firm’s decision to hire more or less workers has a large impact on the wage rate Goal is to hire the fewest workers possible for the lowest wage

MONOPSONY MODEL MRC is higher than the wage rate in a monopsony (unlike a purely competitive market) The MRC curve is above the supply curve A higher wage has to be paid when the firm wants to hire additional worker It must then pay the same wage to existing workers Example: A firm pays $5 to its first worker The firm has to pay $6 to get another worker The MRC for the second worker would be $7 ($6 for him + the additional $1 that must be paid to the first worker)

MONOPSONY MODEL Max profit occurs with # of workers determined by where MRP=MRC The wage is determined by following that quantity down to the supply curve Other things equal, it maximizes profit by hiring a smaller number of workers and thereby paying a less-than-competitive wage rate

THE SUPPLY OF LABOR: MONOPSONY IN THE HIRE OF LABOR Units of Labor Wage Rate Total Labor Cost (Wage Bill) Marginal Resource (Labor) Cost $5 $0 X 1 6 $6 2 7 14 8 3 24 10 4 9 36 12 5 50 11 66 16

Monopsonistic Labor Market W 26.1 MRC S b Wage Rate (Dollars) a Wc Wm c MRP Qm Qc Quantity of Labor Examples of Monopsony Power

Q Labor Wage TLC MRC $14 x 1 $15 2 $16 3 $17 4 $18 5 $19 6 $20

MONOPSONY MODEL 1 MRCL MRCC MRC exceeds price, so the least-cost rule and profit-maximizing rules need adjustments Least-Cost Rule MPL MPC MRCL MRCC Profit Max Rule MRPL MRPC = 1 = =

Factors Impacting Wages Labor unions can increase wages by impacting the demand for union workers S Increase In Demand Wu Wage Rate (Dollars) Wc D2 D1 Qc Qu Quantity of Labor

Wage Differentials Occur when there are differences in wages between occupations Also occurs within the same occupation groups Can be caused by differences in the supply of the workers Can be caused by the demand for the workers