Sunday, November 16, 2014

Perfectly Competitive Resource Market 3 - Perf. Comp. Output market & Monopsony (Labor) Market

Resource Markets 3 - Perfectly Competitive Firm as a Monopsonist 

Monopsonist - a firm that raises wages to attract new workers into the market.
(a single buyer of labor)

mjmfoodie - video with a Perfectly competitive output market but a Monopsonist in the labor market.

In a Monopsonist labor market, MRC is always greater than the wage rate: a wage-maker is a firm that must raise the wages it offers workers in order to attract more individuals to come to work for the firm. Since hiring one more worker requires raising wages for workers already employed (no workers will settle for others hired to do the same job at a lower pay) the cost of hiring the additional workers is higher than the actual wage the firm has to pay that worker.

Profit Max in a Monopolist Labor Market

  • a monoposonist must raise wages to attract new workers
  • the firm is a wage maker
  • MRC is always greater than what the wage rate the firm is paying

Example of a small shop, Notice:
  • because the single employer must raise wages to attract more workers, it will always cost the firm more to hire one more worker than the wage it has to pay that worker.
  • wages must be raised for all workers
  • the MRC rises faster than the wage rate (notice that the wage rate is going up by $10 but the MCL (MRC) by an ever increasing amount
  • as a result the firm will hire fewer workers and pay them lower wages than a perfectly competitive labor market.

Assuming the monopsonist tries to maximise profits, it will demand labour up to the point where MCL = MRP. This will occur at 3 hairdressers, where the MCL and MRP are both £50 per hour, as shown below:

However, the wage paid to the workers is only £30. In this case, the monopsonists is said to be exploiting the workers by paying less than the MRP – i.e. wages are £30 per hour, and the MRP is £50 per hour, meaning that the monopsonist has gained £20. It can achieve this because it does not have to pay the full value of the MRP.

    • as a result the firm will hire fewer workers and pay them lower wages than a perfectly competitive labor market.

    Minimum Wages in Labor Markets

    In the monopsonistic labor market: (Minimum wage increases employment)
    • before the minimum wage, the single firm faced an MRC that was always higher than the wage it pays to hire additional workers.
    • This restricted the level of employment the firm desires to the MRP=MRC level.
    • with the minimum wage, the firm can hire as many workers as it wants at the (minimum wage level). The minimum wage becomes the marginal resource cost. The firm is now a wage-taker.
    • The result is a new equilibrium level of employment that is greater than before the minimum wage was employed.
    "a minimum wage may have negative unintended consequences when labor markets are competitive, in the form of higher unemployment. However, in monopsonist labor markets, the imposition of a minimum wage may lead to greater employment and higher wages for those employed."

    2011B AP Microeconomics Exam FRQ, 3

    a) identify the profit-max quantity of labor for tree mart - Max-Profit is where MRP=MRC/MFC so, MFC crosses the MRP curve at a wage rate of $20 and a quantity of 100.

    b) Identify the wage rate pays to hire the profit-max quantity of labor, the firm will pay a wage rate of $10 dollars.

    c) Identify the quantity of labor hired in each of the following:
    • Tree market operates in a competitive market: In a competitive market the supply of labor is the equilibrium quantity or 200 units.
    • The government imposes a 12.50 minimum wage. The supply curve will become horizontal at the $12.50 rate up to a quantity of 150 units.

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