Equilibrium of Labour Market under Monopsony - Monopsony - Perfectly Discriminating -Non Discrimination -Minimum Wage -Examples

1. Equilibrium in Labour Market
Under Monopoly
Instructor: Prof Kulvinder Singh
Presented by: Prachi Singla
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2. Monopsony
• A monopsony is a firm that faces
an upward-sloping supply curve
of labor.
• De Beers, a diamond producer
and the major employer of
diamond workers in South Africa
could be a close example of a
monopsonist, a single buyer of
labour.
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3. Perfectly Discriminating Monopsonist
The monopsonist faces an upward-sloping labor supply curve. In
addition, a perfectly discriminating monopsonist can hire different
workers at different wages.
The revenue from hiring an extra worker equals the price times the
marginal product of labor, or the value of marginal product. Hence, the
labor demand curve for the monopsonist, as for a competitive firm, is
given by the value of marginal product curve.
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4. The Hiring Decision of a Perfectly
Discriminating Monopsonist
• A perfectly discriminating
monopsonist faces an upward-
sloping supply curve and can hire
different workers at different wages.
The labor supply curve gives the
marginal cost of hiring. Profit
maximization occurs at point A.
• The monopsonist hires the same
number of workers as a competitive
market, but each worker gets paid
his reservation wage.
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5. Non-discriminating Monopsonist
• A non-discriminating monopsonist must pay all workers the same
wage, regardless of the worker’s reservation wage.
• Because the non-discriminating monopsonist must raise the wage to
all workers when he wishes to hire one more worker, the labor supply
curve no longer gives the marginal cost of hiring.
• The profit-maximizing condition for a non-discriminating monopsonist
is given by
𝑀𝐶𝐸 = 𝑉𝑀𝑃𝐸
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6. The Hiring Decision of a Perfectly
Discriminating Monopsonist
• A non-discriminating monopsonist
pays the same wage to all workers.
• The marginal cost of hiring exceeds
the wage, and the marginal cost
curve lies above the supply curve.
• Profit maximization occurs at point
A; the monopsonist hires 𝐸𝑚
workers and pays them a wage of
𝑤𝑀.
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7. Monopsony and the Minimum Wage
• The minimum wage may increase
both wages and employment
when imposed on a monopolist.
• A minimum wage set at ഥ
𝑤
increases employment to ത
𝐸.
• The marginal cost of labor curve,
therefore, is now given by the
bold line in the figure: a perfectly
elastic segment up to ത
𝐸 workers
and the upward-rising segment
beyond that threshold.
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8. Example: Fast Food Industry
• In the fast-food industry, minimum wage increases do not seem to result in
a reduction in the number of persons employed in that industry.
• In contrast, some evidence indicates that these fast-food establishments
may have increased their employment after a minimum wage increase.
• It has been suggested that these positive employment effects of minimum
wages occurred because the fast-food industry is a monopsony in terms of
employing unskilled teenage workers. Because these youths have few
other alternatives, some argue that fast-food restaurants could provide the
“one-company” environment that can generate a monopsony.
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9. Thank You!
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