Monopsony

now, let's discuss the opposite of a monopoly. It's called a monopoly. Sini this is a pretty weird topic, but let's check it out. So monopoly money is, instead of a market with a single seller, like a monopoly, where they're the only ones selling a good. This is a market with a single buyer. Okay, this is pretty rare, but it comes up in cases of labor markets sometimes where there's only one firm that is hiring workers. Okay, so sometimes this comes up. Maybe there's a small town somewhere that exclusively produces lumber, and then they're, the lumber company is the only, uh, firm that is hiring people in this small town to produce the lumber, or maybe some small town where a huge walmart opened up, closed all the, all the shops around here, and everyone works at walmart now, right, so walmart is the main employer in that town, and they are the, basically the, the only firm hiring, buying the labor in the area. Okay, so monopoly, it acts very similar to a monopoly, in that they're going to try and maximize profits. Right? The monopoly. Now, we're thinking about the cost side, right? Where monopolies were thinking about the, the demand for their good. Well, this is the demand that they have for the labor to produce their goods and stuff like that. So they're gonna maximize profits by hiring quantity of workers where the marginal cost of the labor equals the marginal revenue product of the labor. So this is still that idea of marginal cost and marginal revenue, except we're looking at it from the labor side. So they're thinking about the cost of the labor in this case. Okay, so the marginal revenue product is what those laborers can produce, where the marginal cost is, what it's gonna cost to have those laborers. So, if you remember when we were talking about labor in a competitive market, while we had the wage equal the marginal cost of labor, right? There was this competitive wage and that was the marginal cost, no matter how many people you hired. Well, that was gonna be the cost of those hires. However, it's different in a monopoly, we're gonna have a different marginal cost curve from our supply curve of labor. Okay, so the marginal cost of labor is going to be greater than the wage. So how is the marginal cost greater than the wage in this case? Well, that's because hiring one more worker. The idea is that in a monopoly, any, if they're going to offer a higher wage, so think about it. If they wanted to hire one more worker, they'd have to pay a higher wage. But by hiring by paying that higher wage to that worker, they're gonna have to pay a higher wage to all the other workers. They're gonna have to increase the wage for all employees by increasing the wage for this new employee. Okay, so all the employees are gonna have to get this new higher wage. A little interesting. They're a little kind of a weird concept that only comes up in this situation, Let's go ahead and see how it works on a graph. Maybe it'll help help you understand it a little better. So here we're gonna have our our standard demand and supply of labor here, this is our demand and supply of labor. So remember this supply of labor and demand of labor, this would have been the equilibrium wage right here. Let me do it in a different color. Our equilibrium wage in any market, in a competitive market, excuse me, would have been right here, our equilibrium wage. So remember, this is price and quantity. Well, really, instead of price, we say wages, right? When we're talking about a labor market, so our equilibrium wage would have been right here, W Star and our equilibrium quantity quantity. Star Q Star right there. However, the monopoly has power over this market right there, the only buyer, so they're gonna be able to influence this market and be able to have the cost minimizing point that they want to to produce here. So what we're gonna have is in this market. Remember how I said, the marginal cost is greater, right? Because what happens if they were at this point right here, let's say they were hiring at this point and they wanted to hire another worker? Well, that would increase the quantity. But remember how I said, if they're going to increase the wage for one worker, they have to increase the wage for all the workers. So the workers that were being paid this wage down here, let's say $1 now, they're gonna have to be paid $2 all of them are gonna be paid $2. So we only not only have to pay the new work or more money, but the old workers more money as well. So the marginal cost of hiring a new worker is not just a higher wage for that worker, but the higher wage for all the other workers as well. So that leads us to have this steeper marginal cost curve over here. This is the marginal cost of the labor right here, right? The marginal cost of labor is going to be steeper because by hiring one more worker, we not only have to increase their wage, but the wage of all our previous workers as well. So this leads us to our conclusion where they're gonna hire, where the marginal cost equals the marginal revenue, right, just as we're used to marginal cost equals marginal revenue. And remember that our demand curve when we studied labor demand, that is based on the marginal revenue product, what those laborers can produce is gonna be the firm's demand. The firm's demand for labor is based on what those laborers can produce for them, right? The derived demand there, so they're going to want to hire laborers up to the point that the marginal cost equals the marginal revenue and just like we're used to, we'll find that point where the demand, the marginal revenue product equals the marginal cost and that's going to be right here, right? That is the point where we're going to want to hire, but that's not the wage we pay, right? Because the wage we pay is going to be where the supply curve touches that point. So that's the only difference here, is that we're going to at this point where the marginal cost equals the marginal revenue, we're going to go down to the supply curve and that's the wage we're gonna pay right there. Okay, So the wage and I'll put end for monopoly money is going to be lower than the equilibrium wage, right? We've got a lower wage here, which we would expect because they have influence over the market. So the firm is going to want to pay a lower wage, so they're gonna have a lower equilibrium wage. And the lower uh not equilibrium wage, a lower wage in the monotony. And a smaller quantity of workers in the monotony as well. Okay, so it's gonna lead to a lower wage and a smaller quantity, just like when we studied monopolies, and we saw um the same effect from the selling side where they're gonna restrict the output so that they sell less at a higher price. So it's the same thing flipped here, they're gonna hire less at a at a lower price as well here. Cool. So we end up with a lower wage and a lower quantity. Alright, So let's pause here and then let's talk about how a minimum wage law helps the laborers in this market so that they don't get screwed and be stuck with this lower wage and gives them a little more um a little more leeway in the market. All right, so let's pause here. We'll discuss minimum wage laws.

So now let's see how a minimum wage is going to affect the monopoly, any labor market. So if there's a minimum wage, what we're gonna see is that it's going to increase the equilibrium quantity and wage, uh for the the laborers here. So how are we gonna do this? Well, let's set up our graph the same, we had our demand and supply and we had this marginal cost line, the marginal cost of labor that was higher than the supply, right? Because as we hired more labors, we had to increase everyone's wage. Okay? So what we saw in the previous video is that the monotony would hire where the marginal cost equals the marginal revenue product, right? We saw that demand curve is the marginal revenue product for labor. So they would hire at this quantity right here, this is the quantity of the monotony, I'm gonna put em from an ops any, but they would pay this wage right here where the supply curve touches. So this is the wage of the monopoly any right? So this is wages and this is quantity of labor, right? So they would pay that lower wage and have that lower quantity than equilibrium. But if the government stepped in and say, hey, you have to pay the equilibrium wage, they find out what the equilibrium wages, and they say, this is the minimum wage that you can pay right here, you have to pay this minimum wage. Well, what does this do to the marginal cost of labor? So if this is the wage, I'm gonna put m W L for minimum wage law right there. So if the government steps in and says this is the minimum wage, you have to pay well, what does that do for our marginal cost up to that point up to this point where where we reach our equilibrium quantity, Our marginal cost is the minimum wage. Let's say that this wage down here was $10 and this wage is $15. Remember before, if we wanted to hire another worker here and had to pay them $11 an hour to increase uh as the supply increases the price increases right? Um Everyone's wage would have to go up to $11. But that's not the case anymore. If we're gonna hire one worker to workers, three workers, four workers, whatever we're gonna hire, we're gonna have to pay $15. So the marginal cost of labor is going to be that $15 wage all the way across, right? So now the firm has an incentive to hire all the way up to this point, all the way up to the equilibrium amount. And that's exactly what happens if the if the minimum wage law is set correctly, we're gonna end up back at equilibrium, Okay, it's gonna give the laborers a more competitive wage as if we were in a competitive market, remember when we studied wages in a competitive market, we had this flat wage um totally elastic supply, right? Because there was the the wage that was on the market and that was the wage for every worker. The marginal cost of another worker was always just that the amount of the wage. So that's what this minimum wage law in a monopoly any essentially does up to the point of the equilibrium. Cool. So that's exactly what happens here. The minimum wage law effectively increases our uh, equilibrium wage and equilibrium quantity uh, up to the, excuse me, the wage and the quantity up to the equilibrium amount. Okay, so monotony, really, it's not such a big topic in this class. If you see that your professor is talking about it, they generally want you to understand what a monopoly is, and compare it generally to a monopoly, right? So understand that the monopoly has only one seller, monopoly has only one buyer, and the effects that that would have on the market. Cool, Alright, so let's go ahead and move on to the next top.