Glossary
Demand (MRP on graph)
On a monopsony graph, the demand curve for labor is represented by the Marginal Revenue Product (MRP) curve, showing the value that each additional worker brings to the firm.
Example:
The downward-sloping Demand (MRP on graph) curve for professional athletes shows that as more players are available, the additional revenue generated by each new player tends to decrease.
Hiring Rule (MRP = MRC)
The profit-maximizing condition for a firm hiring resources, stating that the firm will continue to hire units of a resource up to the point where its marginal revenue product equals its marginal resource cost.
Example:
A movie studio will continue to hire special effects artists until the additional revenue generated by their work (MRP) equals the additional cost of hiring them (MRC), following the hiring rule to maximize its profits.
Imperfectly Competitive
A market condition where individual firms have some control over prices, unlike in perfect competition where firms are price takers. Monopsonies fall into this category.
Example:
Because a monopsony can set wages rather than accept market rates, it operates in an imperfectly competitive labor market, unlike a small coffee shop hiring baristas in a big city.
Marginal Resource Cost (MRC)
The additional cost incurred by a firm when hiring one more unit of a resource, such as labor. For a monopsony, MRC is greater than the wage rate because hiring an additional worker requires raising wages for all existing workers.
Example:
If a large tech company in a small town wants to hire one more software engineer, it might have to raise the salary for all its current engineers to attract the new talent, making the Marginal Resource Cost of that new hire much higher than just their salary.
Marginal Revenue Product (MRP)
The additional revenue generated by employing one more unit of a resource, calculated as the marginal product of the resource multiplied by the marginal revenue of the output.
Example:
For a pizza shop, the Marginal Revenue Product of an additional delivery driver would be the extra revenue from the pizzas they deliver, minus any associated costs like gas.
Minimum Wage
A government-mandated price floor for labor, setting the lowest hourly wage that employers can legally pay their workers.
Example:
When the government imposes a minimum wage of $15 per hour, it means no employer can legally pay their workers less than that amount, regardless of market conditions.
Monopsony
A market structure where there is only one buyer for a specific resource, such as labor, giving that buyer significant market power to influence the price of the resource.
Example:
In a remote mining town, if there's only one mining company hiring, that company operates as a monopsony for labor, dictating the wages for all local miners.
Perfectly Competitive Labor Market
A theoretical market structure characterized by many buyers and sellers of labor, identical labor skills, perfect information, and free entry and exit, resulting in firms being wage takers.
Example:
The market for entry-level fast-food workers in a large city, with many restaurants competing for employees, closely resembles a perfectly competitive labor market where no single restaurant can dictate wages.
Profit Maximizing Quantity
The level of output or input (like labor) at which a firm's total profit is highest, occurring where Marginal Revenue Product equals Marginal Resource Cost.
Example:
A construction company determines its profit maximizing quantity of construction workers by hiring until the additional revenue from the last worker equals the additional cost of employing them.
Single Large Firm
A key characteristic of a monopsony, indicating that one dominant company is the sole or primary employer in a particular labor market.
Example:
A small island nation with only one major resort chain hiring all the hospitality workers demonstrates the power of a single large firm in a monopsonistic market.
Supply (S on graph)
On a monopsony graph, the supply curve for labor represents the minimum wage workers are willing to accept for different quantities of labor, typically sloping upwards.
Example:
The upward-sloping Supply (S on graph) curve for nurses indicates that a hospital must offer higher wages to attract more nurses to work for them.
Wage Below MRP
A characteristic of monopsony where workers are paid a wage that is less than the value of their marginal contribution to the firm's revenue, due to the firm's market power.
Example:
In a company town where the single factory is the only employer, workers might find their wage below MRP, meaning they are paid less than the actual value they add to the factory's output.
Wage Maker
A firm that has the power to set the wage rate for its employees, rather than accepting the prevailing market wage.
Example:
A professional sports league, as a wage maker, can negotiate and set salary caps or minimum salaries for its players, influencing their earnings.
Wage Rate
The price paid per unit of labor, typically per hour or per unit of output, determined by market forces or firm decisions.
Example:
The wage rate for a freelance graphic designer might be $50 per hour, reflecting the market value of their skills and experience.