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Wize AP Microeconomics Textbook > Labor Market

Monopsony and Perfectly Competitive Labor Market

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Monopsony and Perfectly Competitive Labor Market

A monopsony is when there is a single buyer that has a lot of control over the market. This is different to a monopoly which is a single seller


The marginal cost of the worker is also called the Marginal Factor Cost (MFC). This means the additional cost of hiring one extra worker.


Profit Maximization for Monopsony

  • If VMP (Value of Marginal Product) > Marginal Cost of the worker, the firm should hire
    more
    workers. In the diagram above this is on the
    left
    of 100 workers.
  • If VMP < Marginal Cost of the worker, the firm should hire
    less
    workers. This is on the
    right
    of 100 workers.
  • If VMP = Marginal Cost of the worker, the firm is
    maximizing profits
    and should keep this number of workers. This is at the employment of
    100
    workers and wage of
    $12
    (where 100 hits the supply curve).

Wize Tip
Remember the Value of Marginal Product is the same thing as Marginal Revenue Product. The Marginal Cost of a worker is the same thing as Marginal Factor Cost. Different professors mix these terms up sometimes.


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Perfectly Competitive Labor Market

The perfectly competitive labor market has a regular downward sloping demand and upward sloping supply.


Firm in a Perfectly Competitive Labor Market

  • The individual firms in a perfectly competitive labor market face a horizontal supply curve which is also called the marginal cost (MC) or marginal factor cost (MFC).
  • This is because the firm can hire any amount of workers at that wage rate.
  • The firm will use the quantity of workers that maximizes their profits which is where the Value of Marginal Product (VMP) = MC. In the diagram below this is at an employment of
    4
    workers.

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Example: Labor Market and Monopsony


(a) Assume that the labor and output market for laptops is perfectly competitive. Draw two separate graphs for the market labor supply and demand curves, and an individual laptop firm’s labor demand and supply curve on the second graph. Label the equilibrium market wage as $14 and market employment as 200, as well as the individual firm’s employment as 20.

Market:


Firm:



b) Suppose that all the laptop firms unite into an employers’ organization and coordinate their actions in the labor market so that now they behave as a single employer. Draw the employer’s individual labor supply and demand and marginal cost curves. Label the monopsony wage as $10 and employment at 150. Is the monopsony efficient?




The monopsony is not efficient because employment is not at the level where supply = demand of labor.



c) The labor union proposes a minimum wage, above the monopsony wage (which is called a bilateral monopoly). They argue that when laptop firms behave as a single employer, such a minimum wage will always increase employment. Are they correct?

No. If the minimum wage is higher than the intersection of demand and MC (in the graph that would be above $16) then the employment will decrease because the demand for labor is less than 150. If the minimum wage is between $10 and $16 the employment will increase because supply and demand will be more than 150. A market with a monopsony and a labor union is called a Bilateral Monopoly. If the labor union has more power, the wage will be closer to $16 in the diagram below. If the monopsony has more power then the wage will be closer to $10.