AP MICROECONOMICS
UNIT #6
FACTOR MARKETS
Lecture #4
Monopsony
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
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
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)
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
THE SUPPLY OF LABOR: MONOPSONY IN THE
HIRE OF LABOR
Units of
Labor
Wage Rate
Total Labor
Cost (Wage
Bill)
Marginal
Resource
(Labor) Cost
0
$5
$0
X
1
6
6
$6
2
7
14
8
3
8
24
10
4
9
36
12
5
10
50
14
6
11
66
16
Monopsonistic Labor Market
Wage Rate (Dollars)
MRC
W 26.1
S
b
a
Wc
Wm
c
MRP
0
Qm
Qc
Quantity of Labor
Examples of Monopsony Power
Q Labor
Wage
0
$14
1
$15
2
$16
3
$17
4
$18
5
$19
6
$20
TLC
MRC
0
x
MONOPSONY MODEL
■ 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
=
=
MRCL
MRCC
1
Factors Impacting Wages
Wage Rate (Dollars)
■ Labor unions can increase wages by
impacting the demand for union workers
S
Increase
In Demand
Wu
Wc
D2
D1
Qc
Qu
Quantity of Labor
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