1. AP MICROECONOMICS UNIT #6 FACTOR MARKETS
Lecture #4
Monopsony

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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

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

9. 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 = =

10. 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

11. 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