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Monopsony vs. Competitive Labor Markets

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Bryan Lanier

on 17 April 2014

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Transcript of Monopsony vs. Competitive Labor Markets

Monopsony vs Competitive Labor Markets
Graphs of Monopsony vs competitive markets
Income and Substitution effect cont.
Income and Substitution effect
Labor Markets
Monopsony is similiar to a monopoly, only that instead of there being a seller that controls the market, there is a buyer that controls the market.
The Income and Substitution effect greatly effect the hours worked in the Labor market - People substitute leisure with labor at lower wages, until the income effect becomes dominate when wages are so high that people substitute labor with leisure.
Perfectly competitive firms hire up to the point where the Marginal Revenue Product (MRP) = the wage rate.
The income effect is how a consumers demand for a good or service is changed by how much income they have.
The two factors that affect the demand for labor are the Marginal Physical product of labor and the price of the product.
Competitive Labor Markets and Monopsony
A monopsony can have so much buying power that sellers have to agree to their terms.
In a Monopsonostic market a firm will hire up to the point where the Marginal Revenue Cost (MRC) of the next worker is equal to the MRP.
The wage rate determines the market supply of labor
The Marginal Revenue Product (MRP) of labor helps determine the market demand for labor - firms hire up until MRP = wage rate
The substitution effect is how a consumers demand and preference changes as goods and services become more costly - in labor markets this is seen by more workers wanting to work for a higher wage.
A Monopsony has a higher wage rate than a perfectly competitive market but hires less workers.
Full transcript