Monopsony

2

Let’s Review Factors

• Factors- Machines, Labor – continuous input.

• Wage rate set by labor supply and demand • Firms and employees are wage takers, not wage

setters. • Marginal Resource Cost- Cost of an additional worker • Marginal Revenue Product- the additional revenue

created by the additional worker (Price of product times Marginal Product of Labor

3

Let’s Review Factors

• A firm will produce until MRP=MRC• In Perfect Competition: • MRP=Demand • MRC=Supply

SL

DL

Wage

Q

Wage

Q

Industry FirmQE

WE

Qe

DL=MRP

SL=MRC

Side-by-side graph showing Market and Firm

Monopsony

• One buyer of labor • When does this occur?• Their supply curve is the industry

supply curve. • One firm is now a wage setter

(factor cost setter) instead of wage taker (factor cost taker)

5

Examples of Monopsony

• Mining Companies in mining towns • The US Military • Walmart in small towns?

6

7

$

L

Wage Qs

4 0

5 1

6 2

7 3

8 4

1 2 3 4

8765

S

In this example the suppliers of labor will supply a q of 1 when the wage is 5, and so on.

Wage Quantity

4 0

5 1

6 2

7 3

8 4

8

$

E

Wage Qs TRC MRC

4 0 0 xxx

5 1 5 5

6 2 12 7

7 3 21 9

8 4 32 11

1 2 3 4

8765

S

Marginal Resource (labor) Cost is now different than labor supply , it’s higher!

Meaning the employer can gain additional workers at additional cost.

The employer can choose the wage rate!

MRC

Wage Quantity Total Resource Cost

Marginal Resource Cost

4 0 0 N/A

5 1 5 5

6 2 12 7

7 3 21 9

8 4 32 11

Where would a monopsony produce

• Quantity-MRP=MRC• But what wage would

people be willing to accept at that quantity• The monopsonist will

move down to the supply curve- hiring fewer people at a lower wage – creating deadweight.

9

Monopsony- Inefficient Labor Market

• Deadweight created• Fewer jobs at lower wages