- [Instructor] So let's
continue with our conversation
around factors of production for a firm,
and we're going to focus
on the labor market.
And so we've already drawn
axes like this multiple times,
where our horizontal axis,
this is the quantity,
quantity of labor that's
being employed by a firm.
And then the vertical axis,
this is our wage rate.
And so this is, we're looking
at the economics for a firm.
And we're looking at how much labor
is it rational for this firm to employ?
And we've talked about the marginal
revenue product multiple times.
This is a view of how much
incremental revenue can
the firm get every time it
brings on one more labor unit?
And we've talked about
that we typically see it
like a downward-sloping line like this
'cause you have diminishing returns.
Every time you add one more labor unit,
the marginal revenue product
of that labor goes a little bit down,
and so that's when you
have diminishing returns.
So this is marginal revenue products,
and I'll be very particular this time.
This is of labor.
We could do a similar
marginal revenue product
of other factors like land or capital.
Now, to change things up in this video,
we're not just going to talk about a firm
that operates in a perfectly
competitive labor market.
If we did, then its marginal factor cost
would be whatever the
market wage rate would be,
and it would be a
horizontal line like this.
So you would have a marginal
factor cost of labor.
But we're not going to talk about a firm
that's in a perfectly
competitive labor market.
We're going to talk about a firm
that is a monopsony
employer, a very fancy word.
So it is a monopsony,
not a monopoly, a monopsony.
Now, what does a monopsony mean?
Well, you could almost view it as
the reverse of what a monopoly is.
A monopoly is you have one seller,
so one seller,
and many buyers,
so many,
many buyers.
So that is a monopoly,
monopoly right over there.
A monopsony is when you have
one buyer,
so one buyer,
and many sellers.
And so you have many,
many sellers.
So this right over here
is a monopsony firm,
monopsony.
And in the context that
we're talking about,
we're talking about labor markets.
So this one, instead of saying one buyer,
you could say this is one buyer of labor.
So you could say one employer,
one employer.
And the sellers of labors,
well, a seller of labor, well,
these are many potential,
potential workers,
potential workers.
And there is many real-world examples
that approach monopsony employers.
Let's say we're in a small town,
and there's only one hospital,
so they're going to be
the monopsony employers
of healthcare workers, of, say, nurses.
And so what's interesting
about a monopsony employer
is they're not just going to
take whatever the wage rate is,
they have to essentially,
they have a supply curve
for labor in that market.
And so, for example, in this market,
when wages are low,
there's going to be a low supply of labor.
Not many people are going to
wanna work for that hospital.
And then as wages go up,
more and more and more
people are going to want
to work for that monopsony employer.
And so this is our labor,
labor supply curve.
Now, I'm gonna ask you a question.
I'm gonna tell you right
now, it is a trick question.
What is going to be the rational quantity
for this firm to hire?
Now, you might be tempted to say, well,
it's just the same thing.
We would just want to keep hiring
as long as our marginal
revenue product of labor
is higher than the cost of labor.
And that would be true if you could afford
to pay everyone a different rate.
If this first unit of labor,
you can pay someone this much,
and then everyone that you hire,
you have to just pay
them a little bit more.
But that's not the way
that it typically works.
In the real world, you
often think about having to,
whatever the wage is, if we
decide that this is the quantity
of labor that we wanna bring on,
you wouldn't pay this wage just
to that incremental person,
you would have to pay
that wage to everyone.
And so to think about what is
the rational quantity of labor
to bring on for this firm,
we would need to think,
we need to calculate or at least visualize
what the marginal factor
cost of labor here,
which is going to be different
than our labor supply curve.
And to help us visualize that,
let me set up a little table here.
So I'm just gonna make up some numbers.
So look, we're going to think
about the quantity of labor,
so let's just go zero, one,
two, three, four.
And then let's think
about the price of labor.
And so let's say when the
quantity of labor is one,
the price of labor is three.
And then it goes up as we,
if we wanna hire more people,
well, the price of labor goes up to four,
goes up to five, goes
up to six, keeps going.
And then what would be
the total cost of labor?
So total labor cost,
well, you could figure that out.
If you hire one unit at $3 per unit,
one times three is three.
Two units at $4 per unit,
remember, you're going to have
to pay everyone the same amount.
So it's not like you can
just pay this first person $3
and only the second person $4,
in which case, this would be seven.
But if you're going to hire two units,
you have to pay everyone $4.
So your total cost is
eight here, two times four.
Three time five, your total cost is 15.
Your total cost here is 24.
And so now we could think about
what is our marginal factor cost of labor?
So when you bring on that
incremental unit of labor,
how much incremental
cost are you taking on?
Well, when you go from one to two units,
your total cost goes from three to eight,
so your marginal factor cost is five.
This is plus five right over here.
When you go from two to three,
your marginal factor cost,
you went from eight to 15.
So eight to 15, you went up by seven.
And once again, this is because
when you wanna hire more
people, you're going to have
to pay more to track
those incremental people,
but then you have to pay
that higher rate to everyone.
And so you see that the
marginal factor cost of labor
is going up twice as fast
as our labor supply curve.
Our labor supply curve,
every incremental unit, we're adding one.
Here, every incremental
unit, we're adding two.
And we could see it again.
To go from 15 to 24,
you have to add nine,
so our marginal factor
cost of labor is nine.
And so looking at this as an example,
you see that your marginal
factor cost of labor
is going to go up at twice the slope
of your labor supply curve.
So your marginal factor cost of labor
is going to look something like this.
It's going to go up twice as fast,
marginal factor cost of labor.
And now this might be ringing a bell.
This might seem like what
we studied in the past
when we looked at a monopoly
or an imperfect competitor firm.
And we talked about the
demand for its goods,
and we also talked about
its marginal revenue.
And the marginal revenue curve
had twice the negative
slope as the demand curve.
And here, we see everything
just flipped over.
Because we're now not talking
about revenue for the firm
and marginal revenue for the firm,
we are talking about costs for the firm.
These are inputs for the firm.
But now what would be
the rational wage rate?
And what's the rational
quantity of labor for this firm?
Well, now that we've done
the marginal analysis,
we would see that it's
rational for the firm
to keep bringing on more and more people
as long as the marginal
revenue product of labor
for each incremental unit is higher
than the marginal factor cost of labor
for each incremental unit.
And so we'd keep hiring
until you get to this
point right over here.
So it would be rational for it to
bring on this quantity of labor.
And what would be the
wage that it would pay?
Well, you might be tempted
to just go right over here
and say it would pay this wage,
but remember it doesn't
have to pay this wage.
At this quantity of labor, the
labor supply curve tells us
that the market wage
would be right over here.
So it would be paying,
it would be paying this wage.
It would be paying this
wage right over here.
So this is something for you
to maybe ponder on a little bit more.
But the big picture is,
is when we're dealing
with a monopsony firm,
so it is the only person
hiring in the market
or something that's
approaching a monopsony firm,
it's going to have its
own labor supply curve.
And the way you think about
what a rational quantity
for it to hire is,
you would think about the
marginal factor cost of labor,
which is going to go
up at twice the slope.
And where that intersects
the marginal revenue product,
well, that tells you the quantity,
and then the labor supply
curve will tell you the wage
for that quantity.
