Competitive vs. Market Power Firms

Competitive Labor Markets Entire Factory Industry Individual Firm Price SL Price Small firms can hire all their workers at Market wage DL= MRPL DL= MRPL $10 Q1 E1 -------------- ------------- $10 SL Q1 ------------------- Qty Qty Low Skilled Workers T-Shirt Manufacturer

Competitive vs Market Power MR < P for a firm with market power MR = P for a competitive firm Therefore: MRPC > MRPM MRPC = MPL * MR MRPM = MPL * MR P MRPC MRPM Wage Rate -------------- Firms with market power will hire less workers! (Monopoly, Oligopoly, Monopolistic Competition QM QC Qty

Competitive Firm vs. Monopsony A competitive firm Price = MR Hire labor where MRPL = wage rate (MFC) They are “wage takers” MRP = MR * MP & (since P = MR) MRP = P * MP A firm with Market Power Hire labor where MRPL = MFCL MRP ≠ P * MP MRP = MR * MP This causes market power firms to hire less workers than competitive firms

Labor Markets Completion Monopsony Labor Markets Completion

Monopsony Definition: When one firm is the sole purchaser of labor services in a market Therefore, a monopsony can not hire more workers without increasing wage rate

Competitive Firm vs. Monopsony A competitive firm Hire labor where MRPL = Wage Rate = MFCC They are “wage takers” A Monopsony Hire labor where MRPL = MFCL Can not hire more workers without increasing wage rate MFCM > MFCC

Monopsony Final Outcome: Hire less than competitive market MFCM To hire more workers wages must rise for all workers Therefore MFCM ≠ Wage MFCM > Wage S =MFCC DL = MRPL Wage ---------------- ------------------ WM --------------------- ------------- WC Qty-Labor Final Outcome: Hire less than competitive market Monopsony firms pay: WM < WC = MRPL

Monopsony Summary Firm which controls one labor market Must pay a higher wage to hire workers This leads to all workers getting a raise END RESULT: Hire less workers at a lower wage than competitive markets MFCM > MFCC

Worksheet Labor Markets, Monopoly & Monopsony

OUTPUT MARKET INPUT MARKET Product Market Factor Market OUTPUT MARKET INPUT MARKET What: Produce Goods/Services Equilibrium: MR = MC What: Hire factors of production Equilibrium: MRP = MFC D (MR) S (MC) Competitive Market D S (MC) Market Power Market MR End Result: Market Power Firms: Produce less Qty Charge higher Price End Result: Market Power Firms: Hire less Qty

Monopsony Final Outcome: Hire less workers & pay less Example: only buyer of labor in a small town A Monopoly is not usually a Monopsony. MFCM ≠ Wage MFCM > Wage Final Outcome: Hire less workers & pay less