1. Competitive vs. Market Power Firms

2. 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

3. 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

4. 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

5. Labor Markets Completion
Monopsony
Labor Markets Completion

6. 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

7. 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

8. 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

9. 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

10. Worksheet
Labor Markets, Monopoly & Monopsony

11. 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

12. 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