1. THE MARGINAL PRODUCTIVITY THEORY OF DISTRIBUTION (MPTL)

2. Overview We now want to turn to input markets: labor, capital etc.
Firms demand inputs; individuals supply inputs.
The main focus of this section is on how input prices are determined in both competitive and non-competitive markets.

3. ASSUMPTIONS OF THE THEORY
all units of labour are homogeneous
Labour can be perfectly substituted for another
There is perfect mobility of labour between different places and jobs
There is full employment of labour and resources
It is applicable in the long run.
It is based on the law of variable proportion.
There is perfect competition in the labour and output markets

4. Criticisms of the MPTL
The assumption that all units of labour are homogeneous is unrealistic
Units of labour are not perfectly mobile
There is no perfect competition market
There is no full employment of labour –full employment assumption makes the theory static
Labour is not divisible
Production is not the result of labour alone
Profit motive is not the main motive
Not applicable in the short run
Neglect of technical progress
No justification for the inequalities in wages

5. The Case of the Variable Input (Labour) and Output Markets
Price and Employment of Inputs under Perfect Competition
The Case of the Variable Input (Labour) and Output Markets
in perfectly competitive product and input markets, factors are paid the value of their marginal physical product.
Profit Maximization-One variable Input
a firm will maximize profit by producing an additional unit of output as long as, the output adds more to revenue than to cost

6. Profit Maximization-One variable Input
Price and Employment of Inputs under Perfect Competition
Profit Maximization-One variable Input
In the case of employment decision, a firm will maximize profit by hiring another unit of labour as long as it adds more to revenue than to cost.
i.e. 𝑀𝑅𝑃 𝐿𝑋 = 𝑀𝑃 𝐿 𝑀𝑅 𝑋
The revenue gained from the employment of an additional unit of labour equals the marginal product of labour multiplied by the marginal revenue obtained from the sale of the resulting output

7. Profit Maximization-One variable Input
Price and Employment of Inputs under Perfect Competition
Profit Maximization-One variable Input
The value of the marginal product is the resource’s marginal Revenue product (MRP)
If the firm sells its product in perfectly competitive market, the firm’s Marginal Revenue will equal Price or Average Revenue (AR)
i.e. 𝑉𝑀𝑃 𝐿𝑋 = 𝑀𝑃 𝐿 𝐴𝑅 𝑋

8. Price and Employment of Inputs under Perfect Competition
Units of fixed Input
Units of Labour
Total Product of labour
GH¢
Marginal product of labour
Value of the marginal product of labour 1 2 3 4 5 6 7 12 18 22 25 27 26 - -1
500
700
600
400
300
200
-100

9. Figure 1 below shows the graph of the data above.
Price and Employment of Inputs under Perfect Competition
Figure 1 below shows the graph of the data above.
The figure includes a second line drawn to show the supply curve of the input.
The supply curve is horizontal line to indicate that the firm is competitive in the purchase of labour
As a competitive purchaser the firm can hire any units of labour at the going wage rate
As more labor is hired, VMPLX will fall due to diminishing marginal physical product.
As the wage rate falls, the firm is able to hire more workers even if they add less to total output than previous workers.

10. Price and Employment of Inputs under Perfect Competition
Labour
VMPL/Wage
VMPL
400
W = AW= MW
Fig 1: Optimal Labour Quantities; Single VariableInput

11. How many workers will the firm hire if the wage is GH¢5? GH¢4?
Price and Employment of Inputs under Perfect Competition
How many workers will the firm hire if the wage is GH¢5? GH¢4?
Labour Input
per Hour
Pizza
Produced
Marginal
Product
(Pizza)
Value Product
(GH¢1.00 per Pizza) 1
20.0
GH¢20.00 2
28.3
8.3
8.30 3
34.6
6.3
6.30 4
40.0
5.4
5.40 5
44.7
4.7
4.70 6
49.0
4.3
4.30 7
52.9
3.9
3.90 8
56.6
3.7
3.70 9
60.0
3.4
3.40 10
63.2
3.2
3.20

12. Formal Derivation of the Equilibrium of the Firm 𝑸=𝒇(𝑳, 𝑲 ) 𝑪= 𝑾 𝑳+𝑭
Price and Employment of Inputs under Perfect Competition
Formal Derivation of the Equilibrium of the Firm
𝑸=𝒇(𝑳, 𝑲 )
𝑪= 𝑾 𝑳+𝑭
𝑹=𝑷𝑸=𝑷𝒇(𝑳, 𝑲 )
𝝅=𝑹−𝑪
𝝅=𝑷𝒇(𝑳, 𝑲 )− 𝑾 𝑳+𝑭

13. 𝑷× 𝒅𝑸 𝒅𝑳 − 𝑾 =𝟎 𝑷× 𝒅𝑸 𝒅𝑳 = 𝑾 𝐛𝐮𝐭 𝒅𝑸 𝒅𝑳 = 𝑴𝑷 𝑳
Price and Employment of Inputs under Perfect Competition
Formal Derivation of the Equilibrium of the Firm
𝑷× 𝒅𝑸 𝒅𝑳 − 𝑾 =𝟎
𝑷× 𝒅𝑸 𝒅𝑳 = 𝑾 𝐛𝐮𝐭 𝒅𝑸 𝒅𝑳 = 𝑴𝑷 𝑳
𝑷× 𝑴𝑷 𝑳 = 𝑾 or
𝑽𝑴𝑷 𝑳 = 𝑾

14. Demand Curve for Labour (Single Variable Input Case)
Price and Employment of Inputs under Perfect Competition
Demand Curve for Labour (Single Variable Input Case)
The demand for labour is a derived demand, which is derived from the demand for the product that labour produces
the demand for labour depends not only on the demand for its product but on its elasticity of demand
the firm’s demand for labour depends on the marginal productivity of labour
under perfect competition in the output market, if the firm hires only labour as variable input, the negative sloping portion of the MRPL/VMPL curve is the firm’s demand curve for labour

15. Profit Maximization The Case of Several Variable Inputs
When we have more than one variable factor of production the VMP curve of an input is not its demand curve
Why?
Simultaneous use of various resources in production
change in the price of one factor leads to changes in the employment (use) of the other factors
shifts the Marginal Product curve of the input whose price initially changed

16. Responses to Changes in Input Prices
Two variable case: both labor and capital can change.
Substitution effect: The substitution of one input for another while holding output constant in response to an input price change.
Firms will use more of the input that is relatively cheaper.
Output effect: The effect of an input price change on the amount of that input hired that results from a change in the firm’s output level.
A lower input price reduces marginal cost, which will lead the firm to increase its output and demand more inputs.

17. Profit Maximization The Case of Several Variable Inputs
To maximize profits in the case of several variable inputs the firm must hire inputs until the VMP of each input equals the input’s price
𝑉𝑀𝑃 𝑖 = 𝑃 𝑖 -----(1)
for i = 1,2,3, …,n variable inputs
Pi is the hiring price of the input i and MPi is the marginal product of the input i
𝐴𝑅= 𝑃 𝑖 𝑀𝑃 𝑖 −−−(2)

18. Profit Maximization The Case of Several Variable Inputs
Equation 2 means that the marginal cost of output is the same for the last unit of any of the variable input hired
Equation 2 can be rewritten as:
𝐴𝑅= 𝑃 1 𝑀𝑃 1 = 𝑃 2 𝑀𝑃 2 = 𝑃 3 𝑀𝑃 3 =⋯= 𝑃 𝑛 𝑀𝑃 𝑛 =MC-----(3)
By inversion equation (3) can be written as
𝑀𝑃 1 𝑃 1 = 𝑀𝑃 2 𝑃 2 = 𝑀𝑃 3 𝑃 3 =⋯= 𝑀𝑃 𝑛 𝑃 𝑛 = 1 𝑀𝐶 -----(4)

19. Profit Maximization The Case of Several Variable Inputs
Equation 4 above means that the output for the cost Cedi spent on the first input equals the output obtained from the last Cedis spent on the second input
The firm cannot reallocate expenditure and obtain more output for the same expenditure or maintain the same output for less expenditure once equation (4) is satisfied.

20. The Firm’s Input Demand Curve: The Multiple Variable Input Case
VMPL1 D
Labour R S
VMPL2
Wage
P1 (W1)
P2 (W2)
Figure 4.17: Input Demand with Multiple Variable Inputs

21. The market demand curve for an input
The market demand for an input, say labour, is derived from the input demand functions of the firms using the input

22. The market demand curve for an inputR S T
Labour
Wage D d1 d2 W1 W2
Fig 4.18: Derivation of the Market Demand for an Input

23. Determinants of Elasticity of Derived Demand
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐿𝑎𝑏𝑜𝑢𝑟 𝐷𝑒𝑚𝑎𝑛𝑑= % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝐿𝑎𝑏𝑜𝑢𝑟 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑊𝑎𝑔𝑒 𝑅𝑎𝑡𝑒
The elasticity of derived demand varies enormously from one input to another
The determinants of the elasticity of derived demand are summarized in four propositions
Proposition 1: The demand for an input is more elastic, the larger is the elasticity of demand for the final product.

24. Determinants of Elasticity of Derived Demand
Proposition 2: The demand for an input is more elastic, the more easily other inputs can be substituted for it.
Proposition 3: The demand for an input is more elastic, the larger is the (price) supply elasticity of other factors.
Proposition 4: The demand for an input is more elastic in the long run than in the short run.

25. The Market Supply for Input
To a single competitive firm the supply curve of an input is perfectly elastic – a horizontal line – but for the whole market the supply curve of an input is positively sloped
The supply curve labeled S1 describes the case of intermediate goods.
Intermediate goods are inputs in the production of final goods
The amount supplied of intermediate goods is larger at higher prices and smaller at lower prices

26. The Market Supply for Input
Labour
Wage

27. The Market Supply for Input
The supply curve labelled S2 describes the supply of self-owned inputs.
Labour is an example of such an input.
The owners of labour can engage in work or leisure.
As wage rates increases labour owners may choose to substitute work for leisure and supply more labour to the factor market
At still higher wage rates the income effect of the wage increase may induce some labour owners to purchase more leisure and withhold labour from the factor market.
If enough individuals withhold labour the result is a backward bending supply curve

28. The Market Supply for Input
Labour
Wage

29. The Market Supply for Input
The supply curve labeled S3 describes an input in fixed supply.
An example is unimproved land.
The supply of a factor in fixed supply is not responsive to the earnings of the factor
an increase or reduction in the input’s price does not affect the supply of the input
The payment to a factor in fixed supply is rent
Rent is a function of the scarcity of existing land
What inferior (less fertile) land does is merely to set a limit to the rent that can be earned on the most fertile land

30. The Market Supply for Input
Wage
Labour S3

31. The Determination of Factor Price in Perfect Markets
the price of an input is determined by the interaction of the demand and supply of the input
For the competitive firm, the hiring price of the input is the input’s average factor cost (AFC) and marginal factor cost (MFC)
to maximize profits the firm hires an input until the MFC of the input equals the input’s VMP
In the diagram below this occurs at q units of the input employment

32. The Determination of Factor Price in Perfect MarketsQ
Wage
Wage/VMPL W
Labour
VMPL
SL = AFC = MFC
A Competitive Firm in a Factor Market q

33. Price and Employment of Inputs under Imperfect Competition
The price of an input when there are imperfections in the commodity and factor markets, is determined by the same mechanism as in the case of perfectly competitive markets
the determinants of the demand and the supply are different in the case of market imperfections

34. Monopolistic power in the product market
Demand for a Single Variable Factor (Labour) By a Monopolistic Firm
Assumption
the firm uses a single variable factor (labour), whose market is perfect
The wage rate is fixed
Supply of labour to the individual firm is perfectly elastic
the firm has monopolistic power in the market of the commodity it produces

35. Monopolistic power in the product market
Demand for a Single Variable Factor (Labour) By a Monopolistic Firm
The assumptions imply that:
the demand for the product of the firm is downward-sloping
the marginal revenue is smaller than the price at all, but the first, levels of output
Under such condition, the demand for labour is not the VMPL but the MRPL

36. Monopolistic power in the product market
DX/ARX
MRX
Price/ Revenue Q
Imperfect Product Market

37. Monopolistic power in the product market
Input
(Labour) TP MP AR
GH¢ TR MR
MRP
VMP 1 2 3 4 5 20 38 54 68 80 18 16 14 12 00 90 70 60
2,000
3,420
4,320
4,760
4,800
100.00
78.89
56.25
31.43
3.33
1,420
900
440 40
1,620
1,280
980
720

38. Monopolistic power in the product market
In the table above, we observe that VMPL > MRPL
the VMPL curve is above the MRPL curve at all, but the first, levels of employment
Reason
Px > MRx at all, but the first, levels of output
the VMPL and MRPL have negative slopes because their components (MPPL, Px and MRx) decline as output increases and the price of the product falls
if the hiring price is GH¢1000, the firm will employ 3 units of the input (this is shown graphically below)

39. Monopolistic power in the product marketSL
Labour 2 3 1 4 5
Wage/MRPL/VMPL
MRPL
VMPL
MRPL and VMPL

40. Monopolistic power in the product market
when MR is less than AR, MRPL is less than VMPL, the competitive firm hires more input than the monopolistic firm
To maximize profit, the firm will equate the hire price of the input with the input’s marginal revenue product
Reason
it is competitive in the purchase of input,
imperfectly competitive in the sale of output

41. Mathematical derivation of the MRPL curve
1. Let the demand function for the product be
𝑃 𝑥 = 𝑓 1 𝑄 𝑥
The total revenue of the firm is
𝑇𝑅= 𝑃 𝑥 × 𝑄 𝑥
The marginal revenue is
𝑑𝑇𝑅 𝑑𝑄 𝑥 = 𝑃 𝑥 𝑑𝑄 𝑥 𝑑𝑄 𝑥 + 𝑄 𝑥 𝑑𝑃 𝑥 𝑑𝑄 𝑥 Or
𝑀𝑅 𝑥 = 𝑃 𝑥 + 𝑄 𝑥 𝑑𝑃 𝑥 𝑑𝑄 𝑥

42. Mathematical derivation of the MRPL curve
2. The production function with labour as the only variable factor is
𝑄 𝑥 = 𝑓 2 𝐿
This implies
𝑀𝑃𝑃 𝐿 = 𝑑𝑄 𝑥 𝑑𝐿
3. By definition the Marginal Revenue Product of Labour is the change in Total Revenue attributable to a unit change in Labour. Thus,
𝑀𝑅𝑃 𝐿 = 𝑑𝑇𝑅 𝑑𝐿
Given that 𝑇𝑅= 𝑃 𝑥 × 𝑄 𝑥 the derivative of total revenue with respect to L is

43. 𝑑𝑇𝑅 𝑑𝐿 = 𝑃 𝑥 𝑑𝑄 𝑥 𝑑𝐿 + 𝑄 𝑥 𝑑𝑃 𝑥 𝑑𝑄 𝑥 × 𝑑𝑄 𝑥 𝑑𝐿
Mathematical derivation of the MRPL curve
𝑑𝑇𝑅 𝑑𝐿 = 𝑃 𝑥 𝑑𝑄 𝑥 𝑑𝐿 + 𝑄 𝑥 𝑑𝑃 𝑥 𝑑𝑄 𝑥 × 𝑑𝑄 𝑥 𝑑𝐿 Or
𝑀𝑅𝑃 𝐿 = 𝑑𝑄 𝑥 𝑑𝐿 𝑃 𝑥 + 𝑄 𝑥 𝑑𝑃 𝑥 𝑑𝑄 𝑥
But from (2)
𝑀𝑃𝑃 𝐿 = 𝑑𝑄 𝑥 𝑑𝐿
And from (1)
𝑀𝑅 𝑥 = 𝑃 𝑥 + 𝑄 𝑥 𝑑𝑃 𝑥 𝑑𝑄 𝑥

44. Mathematical derivation of the MRPL curve
Therefore
𝑀𝑅𝑃 𝐿 = 𝑀𝑃𝑃 𝐿 × 𝑀𝑅 𝑥
𝑀𝑃𝑃 𝐿 × 𝑀𝑅 𝑥 =W---(A)
Given that,
𝑀𝑅 𝑥 = 𝑃 𝑥 1− 1 𝜀 𝑝
Where 𝜀 𝑝 is the price elasticity of demand for commodity X
Equation (A) can be rewritten as
𝑀𝑃𝑃 𝐿 × 𝑃 𝑥 1− 1 𝜀 𝑝 =W−−(B)
Equation (B) shows the relationship among commodity price, factor price, elasticity of demand and the production function

45. Monopolistic power in the product market
Demand For A Variable Factor (Labour) By A Monopolistic Firm when Several Factors Are Used
When more than one variable factor is used, in the production process, the demand for a variable factor is not its marginal revenue product curve, but is formed from point on shifting the MRP curves
The monopolistic firm is in equilibrium at point A employing L1 units of labour
If the wage rate falls from W1 to W2, the firm will move along its MRPL curve to point A1 on the diagram below

46. Monopolistic power in the product market
Demand For A Variable Factor (Labour) By A Monopolistic Firm when Several Factors Are Used
The fall in wage rate has a substitution effect, an output effect and a profit maximizing effect
The net result of these effects is the shift of the MRP curve to the right which leads to the equilibrium point B
Generating points such as A and B at various levels of W, we obtain the demand curve for labour
the demand for a variable factor is more elastic when several variables inputs are used in the production process

47. Demand for a Variable FactorW1 W2 L1
Labour
MRPL1
MRPL2
SL1
SL2
Demand for a Variable Factor DL L2

48. The Market Demand for and Supply of Labour
The market demand for a factor is the summation of the demand curves of the individual monopolistic firms
as the price of an input (labour) falls, monopolistic firms expand their output, the market price of the output falls
The individual demand and marginal revenue curves for the commodity produced shift to the left

49. The Market Demand for and Supply of Labour
Wage W WM We
Labour SL
ΣMRPL
ΣVMPL
MRPL
VMPL
The Market Demand for and Supply of Labour LM Le

50. The Market Demand for and Supply of Labour
The market supply is not affected by the fact that firms have monopolistic power.
the market supply of labour is the summation of the supply curves of individuals
The market price of the factor is determined by the interaction of the market demand and supply conditions
when the firms have monopolistic power, a factor is paid its MRP which is smaller than VMP as shown on the diagram above
This effect is termed “monopolistic exploitation” by Joan Robinson

51. The Market Demand for and Supply of Labour
According to Joan Robinson a productive factor is exploited if it is paid a price less than the value of its marginal product (VMP)
Since MRx < Px, the factor is paid less than its VMP
The difference bb1 and We-Wm in the diagrams above shows that profit maximizing behaviour of imperfectly competitive firms causes the factor price to be less than the value of its marginal product
The difference between bb1 is called monopolistic exploitation
the level of employment is lower in industries which are not perfectly competitive (i.e. Le > Lm)

52. Perfect Competition in the Commodity Market and Monopsonistic Power in the Factor Market
Equilibrium of a Monopsonist Who Uses a Single Variable Input
Assumption
The firm is a monopsonist in the labour market
The supply of labour has a positive slope
The monopsonist pays a higher wage as it expands the use of labour
The supply of Labour shows the average factor cost (AFC) or the price that the monopsonist must pay at different levels of employment

53. Equilibrium of a Monopsonist Who Uses a Single Variable Input
AFC
GH¢
TFC
MFC 1 2 3 4 5
300
600
900
1,200
1,500
2,700
4,800
7,500
2,100
3,700

54. Equilibrium of a Monopsonist Who Uses a Single Variable Input
Total Factor Cost (TFC) is the product of the price of the input and the level of employment
the relevant magnitude for the equilibrium of the monopsonist is the marginal factor cost (MFC) of purchasing an additional unit of the variable factor.
The MFC is the change in the TFC arising from hiring an additional unit of the factor
Hiring an additional unit of input increases the TFC of the factor by more than the price of this unit because all previous units employed are paid the new higher prices

55. the MFC curve lies above the AFC or Supply curve
Equilibrium of a Monopsonist Who Uses a Single Variable Input
the MFC curve lies above the AFC or Supply curve
To maximize profit the firm that is competitive in the sale of output and imperfectly competitive in the purchase of input will equate the input’s Value of Marginal Product (VMP) with the Marginal Factor Cost (MFC) required to purchase the input
shows that the MFC and VMP intersect at e indicating that the firm should hire Le unit of labour and pay the wage rate of We which is the AFC curve.

56. Equilibrium of a Monopsonist Who Uses a Single Variable Input
VMPL/MRPL
MFC
AFC
Wage/ MRPL/VMPL
Labour We
MFC v AFC

57. Monopoly Power in the Commodity Market and Monopsonistic Power in the Factor Market
A firm with both monopoly and monopsony power faces a negatively sloped AR curve in the sale of output and a positively sloped AFC curve in the purchase of input
MRP < VMP and MFC >AFC
for profit maximization, the firm equates MRP with MFC. It hires Ls and pay Ws

58. Monopoly and Monosopny Power
Labour We Wm Ws LS Lp A B e c
MRPL
VMPL
AFC
MFC
Wage/ MPL /VMPL
Monopoly and Monosopny Power

59. Monopoly and Monosopny Power
The firm equates the MFC of labour with its MRP at e
To maximize profits, the firm even pays a lower wage rate (Ws) and reduces input employment from Lp to (Ls)
Monopsonistic exploitation is shown by the difference of the competitive wage and the monopsonistic wage (We – Ws)
This can be split into two parts:
The We-Wm part is due to the monopoly power of the firm, it would exist even if the firms were not a monopsonist in the labour market

60. Monopoly and Monosopny Power
this part is not uniquely attributable to monopsonistic element
the Ws-Wm part is due to the monopsonistic power of the firm in the labour market
This power enables the firm to pay a wage rate lower than the MRP of labour

61. 𝑀𝑃𝑃 𝐿 𝑀𝑃𝑃 𝐾 = 𝑤 𝑟 or 𝑀𝑃𝑃 𝐿 𝑤 = 𝑀𝑃𝑃 𝐾 𝑟
Equilibrium of a Monopsonist Who Uses Several Variable Factors
if the input markets are perfectly competitive the firm minimizes its cost by using the factor contribution at which
𝑀𝑃𝑃 𝐿 𝑀𝑃𝑃 𝐾 = 𝑤 𝑟 or 𝑀𝑃𝑃 𝐿 𝑤 = 𝑀𝑃𝑃 𝐾 𝑟
If the factor market is monopsonistic, changes in the amount of factors employed causes changes in the prices of factors
a monopsonist who uses several variable inputs will use the input combination at which the ratio of the MPP to MFC is equal for all the variable inputs

62. Equilibrium of a Monopsonist Who Uses Several Variable Factors
For two variable-input cases the equilibrium condition of the monopsonist may be stated as follows
𝑀𝑅𝑇𝑆 𝐿,𝐾 = 𝑀𝑃𝑃 𝐿 𝑀𝑃𝑃 𝐾 = 𝑀𝐹𝐶 𝐿 𝑀𝐹𝐶 𝐾

63. Bilateral Monopoly
Bilateral monopoly arises when a single seller (monopolist) faces a single buyer (monopsonist)
Assumption
all firms are organized in a single body which acts like a monopsonist
labour is organized in a labour union which acts like a monopolist
The monopolistic seller faces the demand of the monopsonist buyer labeled D
the monopolist equates the associated marginal revenue curve with marginal cost and asks the price of P1 for Q1

64. Bilateral Monopoly L1 P1 P2 MFC of Monopsonist MC of Monopolist
D of monopsonist=
MRPL of Monopolist
MR of Monopolist
Labour
Wage/Price L2

65. Bilateral Monopoly
A labour union can have monopoly power in providing labour to buyers who can have monopsony power in the purchases of labour
price and output can not be mutually established through profit maximizing behaviour in a bilateral monopoly
The model gives only upper and lower limits which the wage rate could be determined by bargaining
The outcome of the bargaining cannot be known with certainty
It will depend on bargaining skills, political and economic power of the labor union and the firms, and on many other factors

66. Bilateral Monopoly
The monopsonist equates marginal factor cost with marginal revenue product (the D curve) and offers the price P2 for Q2
Since the price goals of the two monopolists cannot be realized, the price and output in the bilateral monopoly market are indeterminate
The only result is the determination of upper and lower limits to the price
The level at which price will be settled depends on the bargaining skills and power of the participant

67. Bilateral Monopoly
The power of each participant is determined by his/her ability to inflict losses to the opposite party and his ability to withstand losses inflicted by the opponent
the possibility of a strike (by labour) or a lock-out (by firm), the financial position of the union and the firm, the general attitude of the public towards a possible strike or lock-out, and other factors play important role in determining the bargaining power of the two monopolists

68. Monopsonistic firm-buyer versus labour union
If the firms have monopsonistic power in the labour market a union can eliminate the portion of the total monopsonistic exploitation that is attributable uniquely to the monopsony power of the firm-buyers
A union can also increase the total wage bill, either by increasing the wage rate or by increasing the level of employment or both.

69. Monopsonistic firm-buyer versus labour union)
The Goal of the Union is to Maximise the Level of Employment
To attain this goal the union sets the wage rate at the level W1 as seen in the diagram below
The supply of labour is now the kinked curve (W1e1 AFCL), and the MFC curve is formed of two discontinues segments W1e1 and aMFCL.
The firm is in equilibrium at e1 where MRPL= MFCL
employment increases and the total wage bill also increases (OW1 e1L1 > O

70. L1 L
MFCL
MRPL
Labour
Wage e1 e W1
AFCL a
Increase in Employment

71. Monopsonistic firm-buyer versus labour union
Each worker receives a wage equal to its MRP
hence the exploitation attributable uniquely to monopsony is eliminated by the action of the union.
the “monopolistic exploitation” is not eliminated

72. The wage bill is obviously increased (OW11 e 𝐿 >O 𝑊𝑎 𝐿 )
The goal of the union is to obtain the maximum wage for the initial level of employment
For this the union sets the wage at the level W11 as shown in the diagram below
The supply curve becomes the kinked curve W11e B1 SL
MFCL consists of the two discontinuous sections W11eB and MFCL
The firm is in equilibrium at the initial point e, where the new MFCL is equal to the MRPL
It pays W11 as wage rate and employs 𝐿 units of labour as in the pre-union period
W11 is the maximum wage rate attainable without a reduction in the initial level of employment, 𝐿
The wage bill is obviously increased (OW11 e 𝐿 >O 𝑊𝑎 𝐿 )

73. Wage
Labour e a B1
MRPL
AFCL
MFCL
W11 L
Fig. 4.29: Maximum 𝑊

74. Monopsonistic firm-buyer versus labour union
the portion of Monopsonistic exploitation attributable uniquely to the monopsony power of the firm is eliminated, since W11= MRPL
the “monopolistic exploitation”, attributable to the monopolist power of the firm in the product market, is not eliminated

75. Alternative Union Goals
The outcome of collective bargaining by union regarding wage and employment depends on the goal it pursues
The union seeks to maximize employment especially it wishes to keep all its members employed.
The union may seek to maximize total wage income of its members
The union may want to achieve maximum hourly wage rate and keep at a core group of its members employed

76. Alternative Union Goals
4. As a monopolist, a trade union may want to maximize profits or rent. That is income over and above the opportunity cost of the workers employed