Question

Discuss how wages are determined in labor markets. Explain how a monopsony market structure is affected by a price floor (minimum wage), and what is the effect of the monopsony of the local economy

Answer 1

The wage determination under labour market:

Wages is determined by the supply of and demand for the labour in the labour market under normal competitive conditions. Wages is determined at the point where supply and demand of labour are in the equilibrium means at the point where downward sloping demand curve (dd) intersects the upward sloping supply curve (ss). The wage rate changes as per the change in demand and supply of labours. As shown in the below diagram:

Monopsony is a market situation when there is only one buyer it occurs due the firms having market power to heir labors. The firms have power to employee labors so they set lower wages to increase their profits and it leads to exploitation of labours. When the minimum wages is set by government in the form of price floor and if the wages is higher than the wages set by Monopsony than it increases cost for the forms and decreases their demand of labours while if the price floor(minimum wages) is set below the wage rate by Monopsony than it reduces cost of production for firms and increases their profits.

the effect of the monopsony of the local economy: the lower wages set by monopsony reduces the welfare in the economy. It leads to redistribution of income and increases income inequality in the society.