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AP Microeconomics – Competition versus Monopsony in Labor Markets

This lesson supports the Factor Markets section of the Advanced Placement Microeconomics curriculum. In this lesson, students are introduced to monopsony in labor markets.

This lesson appears as Lesson 2 in Unit 4: Factor Markets in CEE's Advanced Placement Microeconomics (4th Edition).

Introduction

This lesson asks students to compare a labor market that is perfectly competitive with one that is a monopsony. A monopsony is the sole buyer of labor and must offer a higher wage to attract more workers. The firm’s marginal resource cost from adding another unit of labor is greater than the wage paid to that labor unit. Students work with graphs of perfectly competitive and monopsonistic labor markets to analyze the effects of changes in economic conditions, government policies, and union activities.
 
Bell Ringer: What happens to the level of unemployment when the government establishes a minimum wage? Who benefits from such a policy? Who is harmed by it?

Learning Objectives

  • Demonstrate the differences between a competitive labor market and a monopsonistic labor market.
  • Analyze the effect of a minimum wage in a perfectly competitive labor market and in a monopsonistic labor market.
  • Show graphically the impact of changes in economic conditions, government policies, and union activities.

Resource List

Process

Please refer to Competition versus Monopsony in Labor Markets, Teacher Lesson.

Conclusion

A perfectly competitive labor market is one in which all buys and sellers are so small that no one can act alone and affect the market wage. The interaction of market demand (D) and supply (S) determines the wage and the level of employment. A monopsony exists if there is only one buyer of labor in the resource market. The monopsonist pays as low a wage as possible to attract the number of workers needed.

Extension Activity

There is no extension activity for this lesson.

Assessment

Please refer to Competition versus Monopsony in Labor Markets, Student Resource Manual.