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Video transcript

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 a 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 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 because you have diminishing returns every time you add one more labor unit the marginal revenue product of that labor it goes a little bit down and so and that's when you have diminishing returns so there's 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 it would be a horizontal line like this so you would have a marginal factor cost of labour 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 monopoly now what is 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 working 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 laborers well a seller of labor well these are many potential potential workers potential workers and there are 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 it'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 when wages are low there's going to be a low supply of labor a lot nob not many people are going to want to walk 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 supply curve now I'm going to ask you a question I'm going to 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 could 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 this 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 want to 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 wouldn't 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 going to make up some numbers so look we're going to think about the quantity of labor so let's just go 0 1 2 3 4 and then let's think about the price of labor and so let's say when the quantity of labor is 1 the price of labor is 3 and then it goes up as we break as we if we want to hire more people well the price of labor goes up to 4 it goes up to 5 goes up to 6 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 three dollars per unit one times three is three two units at four dollars 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 three dollars and only the second person four dollars in which case this would be seven but if you're going to hire two you don't have to pay everyone four dollars so your total cost is 8 here 2 times 4 3 times 5 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 1 to 2 units your total cost goes from 3 to 8 so your marginal factor cost has is 5 this is plus 5 right over here when you go from 2 to 3 your marginal factor cost you went from 8 to 15 so 8 to 15 you went up by 7 and once again this is because when you want to hire more people you're going to have to pay more to track those incremental people but they have to pay that higher 8 to everyone and so you see that the marginal factor cost of labour is going up twice as fast as our supply bird supply curve our labor supply curve every incremental unit we're adding one here every incremental unit we're adding to 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 is an example you see that your marginal factor cost of labour is going to go up at twice the slope of your labor supply curve so your marginal factor cost of labour is going to look something like this it's going to go up twice as fast marginal factor cost of labour 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 went had twice the negative slope as the demand curve and here we see everything just flipped over because we're not net 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 labour for each incremental unit and so it would 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 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 labour 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
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