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Monopsony in the Labour Market

Monopsony in the Labour Market. A2 Economics. Aims and Objectives. Aim: To understand monopsony in the labour market Objectives: Recap on the effects of trade unions on the labour market Define and explain monopsony

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Monopsony in the Labour Market

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  1. Monopsony in the Labour Market A2 Economics

  2. Aims and Objectives Aim: To understand monopsony in the labour market Objectives: • Recap on the effects of trade unions on the labour market • Define and explain monopsony • Analyse the effects of a monopsony in a market with no trade unions, and with trade unions

  3. Effects of Entry of a Union into a Previously Competitive Labour Market • Union refuses to supply below Wtu • Kinked supply curve WtuSe • Consequence is that the wage rises and employment falls to Wtu; Qtu • Competitive market WcQc • Market no longer clears • Excess supply exists (Unemployment) Se Real Wage Rate/MRP Wtu Wc D=MRP Employment O Qtu Qc

  4. Power of Trade Unions • Qantas axe 1000 jobs and outsource maintenance from Austrailia • http://www.bbc.co.uk/news/business-15507106 • Do some trade unions still have power? • What could the implications be for the Australian economy and Qantas?

  5. Monopsony Explained • Occurs as a result of lack of competition on the demand side of the market. • Monopolists have power with regard to price setting, so do monopsonists! • Monopsonist employer can use power to drive down wages.

  6. Consider a Monopoly…. Think about monopolistic power.. What determines just how powerful the monopolistic firm is in the market? Answer: market share The same is true of a monopsonist!

  7. Power of Monopsonists • The greater the proportion of employees in a market employed by a particular firm/state, the greater the power that firm/state will have.

  8. Monopsony in a Market without Trade Unions MCL Real Wage Rate/MRP S = ACL Wc Wm D=MRP O Qc Qm Employment

  9. Monopsony Diagram • As a monopsonist the employer is not a wage taker. • As industry’s sole employer it is faced with industry supply curve. • Due to it’s power it can choose any point on the S curve. • Due to upwards slope if the monopsonist wants to employ one more worker, if must offer a higher wage rate. • Marginal cost is therefore greater than average cost of labour

  10. Monopsony Diagram • Because the increased wage must be paid not just to the extra worker, but all other workers in that industry. • Monopsonist will hire an extra worker as long as they add more to revenue than to costs.(MRP>MCL)

  11. Monopsony Diagram • It will cease to hire extra workers where MRP=MCL. • Equilibrium of Qm, where the monopsonist pays the lowest wage for this qty of labour (Wm). • In a competitive market equilibrium = Wc:QC • Therefore the result of monopsony power is to lower wage rates and employment levels.

  12. Monopsony Diagram • Monopsonist pays a wage lower than the marginal revenue product of the last worker. • In a competitive labour market, the wage and MRP are equal. • The extent to which wages less than the MRP are paid in the real world, indicates how powerful the monopsony is.

  13. Produce yourself a set of teaching notes and the monopsony diagram. • You are then to have an economist speed dating session. • You will have 3 minutes to tell your hot date all about monopsony in an attempt to ‘woo’ them with economics knowledge. • Your date will then score you out of ten.

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