Skip to main content

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.


Labels:
Location: New York, NY, USA

Comments

Post a Comment

Popular posts from this blog

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 ...
Post a Comment
Read more

Microeconomics: Long run costs and economies of scale

We have explored the concept of the costs in the short run, it is now time to determine the costs in the long run. But first, let's define the term long run. In economics, the long run occurs when all variables are not fixed. In other words, the long run for a firm is when a firm can change all of its inputs. Then, all costs are variable in the long run. In this time frame a firm is not only able to change the number of workers but also the size of its factories and the number of machines (also known as capital). In the graph below, you can see a number of different short run average total cost (SRATC) curves that depend on the different levels of fixed inputs. At first, the SRATC curves get lower as the firm increases its size, then it flattens out. Finally,  the SRATC curves get higher. These three effects are caused by different economies of scale. The leftward region on the graph represents the economy of scale, where by increasing each input by a constant increas...
Post a Comment
Read more

Macroeconomics: foreign exchange market

A currency exchange rate tells us about the value of a currency relative to another currency.  We say that a currency appreciates when its relative value goes up. We say that a currency depreciates when its relative value decreases. In a market that relates two currencies, if one appreciates, it must be the case that the other currency depreciates.  Demand in the foreign exchange market: it represents the quantity of a currency demanded by agents who are holding other currencies. The agents want to buy goods, services, or financial assets from a country whose currency is demanded. The demand must be downward slopping. The weaker the currency, the more attractive the goods produced in that country are, and foreign consumers need to hold more of that currency in order to buy the products. Thus, a change in the exchange rate leads to a movement along the demand curve. Supply in the foreign exchange market: it represents the willingness of people in the country supply to foreigner...
Post a Comment
Read more