Question

1. What determines the going market rate for any factor of production (wage, interest, rent, and profit)?
2. How might employment discrimination, labor unions, and immigration) change your answer above?
3. What is meant by monopsony and what effect does it have on the market for any factor of production?
4. What is meant by bilateral monopoly and what effect does it have on the market for any factor of production?

Answer 1

a.)

The going market wage for any factor of production is determined by the intersection of the demand and the supply curved for that factor. For instance, for labour, the labour demand curve is by firms that require labour services, which reduces as the wages increase, and the supply of labour is from the households, who need income to survive, and this increases with an increase in the wage. The point at which demand for labour equals the supply for labour, the equilibrium going wage rate is determined and at this point, there is neither excess demand nor excess supply of labour.

b.)

Employment discrimination means that certain kind of labourers will get paid lesser than others. This can be due to gender or racial discrimination. This mainly reduces the market wage rate for that particular segment of the labour force, as their reservation wage of the labourers also reduces.

Labour unions can lobby to increase the market wage rates, but whether they are effective or not will depend on the extent of unionisaton in the economy and the tightness of the labour market.

Immigration will increase the supply of labour, which will reduce the market wage rate as now jobs will be few and labour supply will be more, and hence labourers will be willing to work for lower wages.

c.)

Monopsony means a situation when there is only one buyer. In the case of the labour market, if there is only one buyer of labour, that effectively means that there is only one firm that is hiring labour. In this kind of a scenario, labourers will have no choice but to work for that one employer for whatever wage he is willing to offer, and this can significantly reduce the market wages in the economy.

d.)

Bilateral monopoly is a market situation where there is one buyer and one seller of labour. In this context, a bilateral monopoly will employ heavt negotiation in terms of the labour wages, as there is only one buyer of labour wich makes the labourer vulnerable, but there is also one seller of labour which makes the buyer vulnerable. In this case, wages will be set in such a way that both the parties are satisfied.