Wage determination in competitive and monopsony markets

Overview

Recall questions on how the wage is set in a competitive market, how a monopsonist depresses it, and what a trade union changes.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   In a competitive labour market, how is the wage rate determined?

   Model answer

   The wage rate is determined by the intersection of the market demand for labour and the market supply of labour.

2. 2

   Why is the demand curve for labour in a competitive market downward sloping?

   Model answer

   Because firms hire more workers at lower wage rates due to diminishing marginal productivity — as more workers are employed, each additional worker adds less to output, so firms are only willing to pay lower wages for additional labour.

3. 3

   Explain why the supply curve of labour in a competitive market slopes upward.

   Model answer

   Higher wages attract more workers into the market or encourage existing workers to supply more hours, so the quantity of labour supplied increases as the wage rate rises.

4. 4

   What is labour market equilibrium?

   Model answer

   Labour market equilibrium occurs where the quantity of labour demanded equals the quantity of labour supplied, determining both the equilibrium wage and employment level.

5. 5

   Define a monopsony labour market.

   Model answer

   A monopsony labour market exists when there is a single or dominant buyer of labour, giving the employer wage-setting power.

6. 6

   In a monopsony, why does the marginal cost of labour exceed the average cost of labour?

   Model answer

   Because the firm must raise wages for all existing workers, not just the new hire, to attract additional employees. This makes the cost of hiring one more worker greater than the wage paid to that worker.

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