Microeconomics: competitive factor markets and monopsony

Perfectly-competitive factor markets:

A competitive factor market is a market in which a large amount of firms are looking to hire similar workers. Due to the numerous firms in the market, each firm's hiring decision does not influence the market wage rate. These firms are referred to as wage-takers.

The market wage (w) is determined by the equilibrium of the supply and demand curve for labor (see the graph below). The market labor demand is the summation of all the firms' MRP's at each quantity, and the market supply curve is determined by the workers' willingness to provide more labor at higher wage rates.

For a competitive firm, the market wage is the firm's marginal factor cost (MFC) and the supply curve (S) it faces. Supply equals marginal factor cost because wage is constant. The firm hires the quantity that is equal to the intersection between its MRP and w.

Monospony in the factor market:

A monospony occurs when there is only a single buyer in a market.

If there is a monospony in a factor market, this means that there is a single employer for labor or capital. If a town has one large factory that employs unskilled worker, this is a good approximation for a monopsony.

In a monopsony, the marginal factor cost is different from the labor supply curve. The marginal cost is increasing at a faster rate.

The result of a monopsony in a factor market is a lower price for the factors of production and a smaller quantity of factors used.

You can see that compared with the competitive market in the first graph, the wage set by the monopsony (w') is smaller than the wage rate in a competitive market (w). Furthermore the quantity of factors used is also smaller.

Reference: Mayer,David. AP Microeconomics Crash Course. Research & Education Association (2014). p 128-131.

Comments

Macroeconomics: multiplier and crowding out effects

Multiplier effect: whenever any of the components of AD increases, the increase in GDP will be greater than the initial increase in expenditures. The impact on GDP of a particular increase in spending depends on the proportion of the new income that is taken out of the system to the proportion that continues to circulate in the economy. The multiplier effect tells us the impact a particular change in one the components of AD will have on the total income (GDP). Let k denote the spending multiplier, which is a function of MPC and MPS. The larger the marginal propensity to consume, the larger the spending multiplier. Notice that the larger the MPC, the greater the impact a particular change in the spending variables will have on the nation's GDP. The crowding out effect: If government spending increases without an increase in taxes, the government must borrow funds from the private sector to finance its deficit, thereby increasing the interest rate. This increase in interest ...

Exercise: short and long run effects of a fiscal policy

You are in charge of the government budget for the year 2021. You are told that schools and public roads need to be updated, and you estimate an appropriate budget in order to carry out the task. Describe what will happen in the short run to the economy, and what type of inflation do we see? Describe the supply side effect from this policy, explain what happens in the long run. Assume that there is no crowding out effect. First, note that updating public infractures, assuming taxes stay the same, will require an increase in government spending, which will also have an impact on the investment and consumption level in the economy (remember the spending multiplier?). Therefore, the aggregate demand curve will shift to the right. This will cause inflation (i.e positive change in the price level) and a higher output in the short-run. Note that if we were to assume a large crowding out effect, the short run aggregate supply curve would shift to the left (increase in production c...

Exercise: maximizing profit

Assume that you are the owner of a small business that produces T-shirts. Your the total revenue for your business can be modeled by the following equation: and your total cost corresponds to this function: Find the point at which your firm maximizes its profit. Then, find how much profit the firm if able to earn at that point. Using the total cost and total revenue functions we can set up the profit function: Then, realize that if you want to find the maximum profit, take the derivative of the function and set it up equal to zero, and solve for Q. This is equivalent of taking the derivative of the total cost and total revenue functions and setting them equal to each other. In this problem, I chose the latter option as it was explained in the previous lessons. Notice that profit is often denoted by a capital pi. We are assuming that the TR>TC for some positive value, you can check for yourself. However, if we did not know that, we would first take the first ...

Economics and Statistics

Search This Blog