Question

Your boss has just returned from a meeting of the Birmingham Society of Human Resource Management and announced that there are several concepts drawn from economics that might have an impact on your firm. Do the following for your boss:

1. Explain the “backward bending” supply of labor curve. Explain what goes on in the curve at various points and why that occurs.

2. Your boss thinks that your firm might be pure/perfect competitor in the product market but a monopsonist in the labor market. Explain the firm level supply and demand curves for this situation.

Answer 1

1. In economics, a backward-bending supply curve of labour, or backward-bending labour supply curve, is a graphical device showing a situation in which as real, or inflation-corrected, wages increase beyond a certain level, people will substitute leisure (non-paid time) for paid worktime and so higher wages lead to a decrease in the labour supply and so less labour-time being offered for sale.

The "labour-leisure" tradeoff is the tradeoff faced by wage-earning human beings between the amount of time spent engaged in wage-paying work (assumed to be unpleasant) and satisfaction-generating unpaid time, which allows participation in "leisure" activities and the use of time to do necessary self-maintenance, such as sleep. The key to the tradeoff is a comparison between the wage received from each hour of working and the amount of satisfaction generated by the use of unpaid time.

Such a comparison generally means that a higher wage entices people to spend more time working for pay; the substitution effect implies a positively sloped labour supply curve. However, the backward-bending labour supply curve occurs when an even higher wage actually entices people to work less and consume more leisure or unpaid time.

At very low wage levels, near the subsistence level, the supply curve may also be curved backwards for a completely different reason. That effect creates an "inverted S" or "backward S" shape: a tail is added at the bottom of the labour-supply curve shown in the graph above with the quantity of labour-time supplied falling as wages rise. Then, because families face some minimum level of income needed to meet their subsistence requirements, lowering wages increases the amount of labour-time offered for sale. Similarly, a rise in wages can cause a decrease in the amount of labour-time offered for sale, and individuals take advantage of the higher wage to spend time on needed self- or family-maintenance activities.

2. Monopsony is a labour market structure in which there is a single powerful buyer of a particular type of labour.

In the case of the labour market, a monopsony employer will tend to pay relatively lower wages and employ fewer people (than in a highly competitive labour market.

In every market, there are both buyers and sellers. The buyers' willingness to buy a particular good (at various prices) is referred to as the buyers' demand for that good. The sellers' willingness to supply a particular good (at various prices) is referred to as the sellers' supply of that good.

The buyers' demand is represented by a demand schedule, which lists the quantities of a good that buyers are willing to purchase at different prices

• A perfectly competitive firm is a price taker, which means that it must accept the equilibrium price at which it sells goods. If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales.

• Perfect competition occurs when there are many sellers, there is easy entry and exiting of firms, products are identical from one seller to another, and sellers are price takers.

• The market structure is the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold