1. Supply & Demand for Labor
Stop and Reset: In Unit 5, the roles are reversed.
- YOU (the individual) are the Supplier (you sell your labor).
- FIRMS are the Demanders (they buy labor).
The demand for a resource (like a chef) is derived from the demand for the product they produce (pizza). If nobody eats pizza, nobody hires chefs.
Who Hires? (MRP vs. MRC)
A firm will hire a worker only if that worker brings in more money than they cost.
(The Value of what the worker makes)
(The Cost to hire the worker)
2. Perfectly Competitive Labor Market
In a perfectly competitive labor market, there are many firms hiring and many workers with identical skills. No single firm can dictate the wage.
The Market
The Firm
The Firm is a Wage Taker. The Supply of Labor for the individual firm is perfectly elastic (horizontal).
3. Monopsony (Imperfect Competition)
A Monopsony is a market with only ONE Buyer of labor (e.g., a "Company Town" or a large hospital in a rural area).
- Wage Maker: To hire one more worker, the firm must raise the wage for everyone.
- MRC > Supply: The marginal cost of hiring is HIGHER than the wage paid.
- Result: They hire fewer workers and pay a lower wage than a competitive market.
- Find Q where MRC intersects MRP.
- Go DOWN to the Supply Curve to find the Wage (Wm).
- Notice: The wage is LOWER than the marginal product (Exploitation).
4. Least Cost Combination
If a firm uses both Labor (L) and Capital (K), what is the perfect mix? The firm should spend its next dollar on the resource that gives the biggest "Bang for the Buck."
The Optimization Rule
If MPx/Px > MPy/Py, the firm should spend MORE on X and LESS on Y.
End of Unit 5 Study Guide.