Principles of Microeconomics / Unit 13 MIC 1226 review, 2 to 3 minutes
One Labor Market Four Ways
The idea
One labor market run under competition, monopsony, a union and both at once shows how power on each side moves employment and the wage. Under competition the wage is set where market demand, the sum of firms' marginal revenue products, meets market supply. Each firm takes that wage as its constant marginal factor cost and hires until marginal revenue product equals it. Workers are paid what the last one adds; employment is efficient. Under monopsony one buyer faces the whole supply curve. To hire another it must raise everyone's wage, so marginal factor cost exceeds the wage. It hires where marginal revenue product equals that cost, fewer than competition, and pays the lower supply wage for that number. The missing workers are a deadweight loss of monopoly's shape. Under a union in a competitive market the seller has power. The union sets a wage above equilibrium; firms hire fewer, and the excess supply is the union's rationing problem. Under bilateral monopoly the two powers meet. The employer wants the monopsony wage; the union wants the last worker's marginal revenue product; the wage lands between by bargaining strength. But any union wage above the monopsony wage flattens the employer's marginal factor cost there, so employment rises toward the competitive level. The four cases share one rule, marginal revenue product equals marginal factor cost, and differ only in what marginal factor cost is: the wage, above the wage, the union's wage, or a bargained flat line.
In practice
Worked example: the town's supply runs from one worker at forty dollars a day to six at one forty, rising by twenty, and marginal revenue product runs three hundred, two sixty, two twenty, one eighty, one forty and one hundred. Competition: hire while marginal revenue product beats the supply wage; the fifth's one forty beats one twenty and the sixth's one hundred does not: five workers at one twenty. Monopsony: marginal factor cost is forty, eighty, one twenty, one sixty and two hundred; the fourth's one eighty beats one sixty and the fifth's one forty does not beat two hundred: four workers at one hundred. A union alone, demanding one forty of competitive firms: five hired, six want work, one in excess supply. Bilateral: the union asks one eighty, the employer offers one hundred, they settle at one twenty, marginal factor cost is flat there up to five workers, and the employer hires the fifth.
Where people slip
Three cautions. Monopsony's fewer workers and lower wage compare with competition on the same curves; the wage can still be high in absolute terms. The union raises employment only against a monopsonist; against competitive firms the same wage costs jobs. And bilateral monopoly's indeterminate wage is a result, not a gap: where two parties with power bargain, economics bounds the outcome and does not pick it.
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