So without further ado, let's finish up the supply of labor.
We are looking at the different market structures. There are three structures in the resource market.
Yesterday we looked at a Perfectly Competitive Supply of Labor (PCSL)
Today we are looking at the other two, but they both fall under one type of business: a monopsony.
A monopsony is the resource market equivalent of a monopoly.
A monopoly is when there is only one business selling a product in the product market.
A monopsony is when there is only one business hiring/buying in the resource market.
[Note again that a monopsony does NOT have to be linked to a monopoly. You can have a monopsony in any of the four product markets.]
What is different about a PCSL and a monopsonist?
The key difference is that in a PCSL you can hire as many employees as you'd like at the current wage. That is NOT true for the monopsonist.
If the monopsonist sets the wage at $X, they will get some number of people willing to work. If they need to hire more than that, how can they get more people to show up?
The answer is that they must raise the wages. If they increase the wage above $X, then more people will supply their labor. Thus our supply line in a monopsony will not be horizontal.
The reason we ultimately have three types of resource markets is that there are two different types of monopsonies. They are called a discriminating monopsonist and a non-discriminating monopsonist.
Let's start with the easier of the two, the discriminating monopsonist. The discriminating monopsonist discriminates in that they treat their employees differently. What this means is that when they want to hire more employees they have to raise the wage, but because they discriminate, they only off the new wage to the new employee.
Example: You have five employees and pay each of them $15 an hour. You need a sixth employee. In order to get someone to come work for you, you have to offer a wage of $16 an hour Because you are a discriminating monopsonist, you give the higher wage only to the new employee.
This leads us to talking about the Marginal Cost of Labor (MCL). Remember MCL is the additional cost a business incurs by hiring one more employee. How much more do you pay when you hire the next worker.
For the discriminating monopsonist, the MCL is their wage. When our example business hires the sixth employee the cost of hiring them is $16. This leads us to have this graph for a Discriminating Monopsonist.
Note that once again the Supply line and the MCL line are together. (Like Demand, Average Revenue, Marginal Revenue and Price are together on a MRDARP line.)
We actually could label the line as SMCLW because the line is Supply line, the Marginal Cost of Labor line and the Wage line.
Again what this is showing is that when the business hires another worker, the cost of hiring that worker is their wage. It costs $16 to hire the sixth worker.
Finally we have the non-discriminating monopsonist. The non-discriminating monopsonist doesn't discriminate or choose between their employees. What that means is that when they want to hire more employees they have to raise their wage, but because they don't discriminate, they raise the wage for all of their employees.
Example: You have five employees and pay each of them $15 an hour. You need a sixth employee. In order to get someone to come work for you, you have to raise the wage to $16 an hour Because you are a non-discriminating monopsonist, you raise the wage to $16 for ALL of your employees. In other words, the new employee will get $16 an hour AND you will raise the wage for each of your first five employees buy a $1an hour.
This means the cost of hiring that sixth employee is greater than their wage. Their wage is $16 an hour, but the cost of hiring them must also include the $1 an hour you are giving the first five employees. Thus the MCL for the sixth employee is $16 + $1 + $1 + $1 + $1 + $1 = $21.
Their wage is $21. The MCL for hiring them is $21.
The MCL is GREATER than the Wage and Supply.
This means in our graph the MCL will separate from the Wage and Supply lines. This is akin to how the MR line separates from the DARP line in the product market. However, unlike the MR and DARP lines, the MCL goes UP and is ABOVE the Supply line.
That means our graph supply of a non-discriminating monopsonist will look like this:
The MCL line is ABOVE the Supply line. [Again, we could also label the Supply line as the Wage line.]
So, what happens when we add in our MRP line? We get this:
This is where students often start going wrong, so let's be sure we see and understand what is going on.
How did we find how many people would be hired? We used the golden rule of the resource market. We want to buy/hire where MRP = MRC/MFC/MCL. So we found where the MRP and MCL lines cross and went straight down from there to determine how much Labor to hire.
That part is no different that all of our other graphs. The change is that we determined the Wage (W) by looking at the SW line and NOT the MCL line. We looked at the point where the amount of labor we want (L) is crossing the SW line and then went left from there to determine the Wage (W).
Some Warnings:
1) I want to warn you again against something I see every year. We get to this point and suddenly students forget everything from earlier units and try to do what we've learned in the labor market to everything. The MCL and S split is only in the resource market. Do NOT apply it to the product market.
2) An equally prevalent and vexing error is that students will remember that a PCSL has a horizontal line, but then they will label that line MRDARP. In the resource market for a PCSL it is the Supply line that is horizontal. The demand line is a normal downward sloping demand line AND it isn't even labeled demand. It is labeled MRP.
3) Remember that the 4 product markets and the 3 labor markets can combine in every different combination. There is NO set link between any one of the four and one of the three. In other words, you might sell your product in perfect competition and hire your labor in a monopsony. In truth, lots of firms hire different jobs in different markets.
4) Though we looked at the discriminating monopsonist, the AP test usually only deals with a non-discriminating monopsonist. So much so that they often just say Monopsonist and don't tell you which they mean. If that happens you should assume that they mean a Non-discriminating Monopsonist.
Tomorrow we will have some work related to all of this.
Also, we are going to have one last quiz. It will have a chart like we did at the start of unit 4 and it will ask you to draw the different graphs in the labor market. We will likely do that on Monday of next week.
If you have questions there will be a zoom meeting on Thursday at 10:00
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