3.4.6 - Monopsony

Question 1

This is more for application but how does the UK get away with paying junior doctors so low ?

Answer 1

The NHS controls over 90% of the UK healthcare market! The NHS is pretty much the only place you can get a job as a doctor.

Which means the NHS can force down wages to as little as £12/hour - it knows the junior doctors will have no choice but to accept, otherwise they’ll go unemployed.

Question 2

What is a monopsony

Answer 2

• When there is only one buyer in the market. - This will allow the buyer to use its monopsony power and negotiate for lower prices as they know the seller isn’t receiving demand from elsewhere.
• A monopsonist is a price maker and will drive down prices from suppliers.

Question 3

Examples of pure non monopsony

Answer 3

NHS - Only place for doctors and nurses to go.
Network rail - They are the only one who are buying railway tracks so the suppliers who create railway tracks may be forced to push down their prices.

Question 4

How does the government intervene to reduce monopsony power for employers.

Answer 4

• They intervened by setting a national minimums wave above the equilibrium wage.
• Application : April 20204 minimum wage for 21 + : £11.44, 18-20 : £8.60, under 18 : £6.40

Question 5

Minimum wage diagram for wage inelastic demand for labour

Answer 5

Question 6

Minimum wage diagram for wage elastic demand for labour

Answer 6

Question 7

Final judgment point for wage elasticity demand for labour

Answer 7

• If demand for labour is inelastic then an increase in minimum wage only leads to a relatively small increase in employment
  E1-E2.
• If the demand for labour is elastic then a increase in minimum wage will lead to a greater rise in unemployment
  E1 - E3.

Question 8

Efficiency wage theory

Answer 8

The theory suggests that paying a higher wage can have several benefits for the firm, such as:

Improved worker productivity: When workers are paid a higher wage, they may feel more valued and motivated, leading to increased effort and productivity.
Reduced worker turnover: Higher wages can make it more difficult for workers to leave their jobs, reducing the need for employers to constantly train new employees.
Better worker health: Higher wages may improve workers’ health, as they are able to afford better nutrition and healthcare.
Improved worker quality: By paying higher wages, firms may be able to attract and retain higher-quality workers.

Question 9

Why is the marginal for cost upwards sloping ?

Answer 9

• If the minimum wage for labour increases the average costs of hiring workers increase so marginal cost of hiring labour also increases

Question 10

Wages in a monopsony diagram

Answer 10

2. Monopsony Profit-Maximizing Point (E2, W3)
   
   • The monopsonist hires workers where MCL = MRPL, as this maximizes profit.
   • At this point (E2 workers), the workers’ productivity (MRPL) is valued at W2, but the monopsonist pays a lower wage W3 (based on the supply curve).
   • This wage difference occurs because the employer has the power to set wages lower than workers’ true value.
3. Lost Wages and Inefficiency
   
   • Wages lost:
     Workers are underpaid by the monopsonist. The gap between W2 (what they should earn) and W3 (what they actually earn) represents this underpayment.
   • The yellow shaded area highlights the total lost wages.
   • Employment inefficiency:
     The monopsonist hires fewer workers (E2) than in a competitive market (E1), where wages and employment would naturally be higher.

Question 11

What is a trade union ?

Answer 11

A group of workers who collectively bargain to improve employee welfare.

Question 12

Examples of trade unions

Answer 12

• NUT (National Union for teachers) : Trade Union for teachers.
• BMA (British medical association)

Question 13

What is a maximum wage

Answer 13

The highest wage employers can hire a worker for.
- Soo even the CEOs won’t be able to earn as much as they do e.g they can earn £11,000 per hour but with a maximum wage they will earn only £140 per hour

Question 14

In summary what will a maximum wage lead to ?

Answer 14

A maximum wage set BELOW equilibrium creates excess demand, or a shortage - the lower wage Wmax increases quantity demanded because workers are more cheaper to hire, but decreases the quantity supplied because big shot workers are less willing to work for these lower wages.
- This will help reduce inequality