Model wage and employment in a competitive labour market, then switch to a monopsony employer to see how a dominant buyer of labour restricts employment and pays below the competitive wage. Built for AQA, Edexcel and OCR A Level Economics.
Otti can see your diagram
Set up a scenario, then ask Otti to analyse it, explain the economics, or mark your exam technique — just like a real tutor would.
Competitive: Q* = 40.0, W* = 50.0
The demand for labour is a derived demand: firms hire workers because of the output they produce and the revenue that output earns. This tool models wage and employment in a competitive labour market and under monopsony, where a single dominant employer can set the wage, and lets you add a national minimum wage to either.
Label the axes wage (W) and quantity of labour (Q), label D = MRP and S, and mark both the original and the new wage and employment. For monopsony, draw MC_L above S, mark Q_M where MC_L = MRP, then read the wage down to the supply curve and compare W_M and Q_M with the competitive W* and Q*. In a minimum wage question, state where the minimum wage is set relative to equilibrium, then follow the chain through: a higher wage raises costs, firms move up their MRP curve and employ fewer workers, while more people want to work, so unemployment rises. Use the monopsony case as a contrast to reach a judgement.
Evaluate: The effect of a minimum wage depends on where it is set and on the structure of the labour market. In a competitive market a high minimum wage reduces employment, especially where labour demand is wage elastic, for example where machines can easily replace workers. Where employers have monopsony power, a modest minimum wage can raise both pay and employment. Real labour markets sit between these cases, so the employment effect may differ by region, industry and age group.
Revise the theory behind this tool in our Edexcel revision notes:
Practise drawing the static versions you will need in the exam:
Firms do not want workers for their own sake; they hire them to produce goods and services that can be sold. The demand for labour therefore depends on the demand for the product. If demand for the product rises, its price and the marginal revenue product of labour rise, so firms want to employ more workers at every wage.
Monopsony is a labour market with a single dominant buyer of labour, such as a large employer in a small town. To hire one more worker it must raise the wage for all its workers, so its marginal cost of labour is above the supply curve. It hires where MC_L equals MRP, employing fewer workers at a lower wage than a competitive market would.
Yes, under monopsony. If a minimum wage is set above the monopsony wage but not above the competitive wage, the employer faces a flat marginal cost of labour up to the supply curve. Hiring an extra worker no longer raises pay for existing workers, so the employer hires more. Both the wage and employment can rise, unlike in a competitive market.