What to explore
Change parameters and watch the model adjust.
- MRP intercept and slope
- Labour-supply intercept and slope, and the minimum wage
Intermediate firm theory
Monopsony and the Minimum Wage
A single employer of labour faces the whole upward supply curve, so it hires fewer workers at a wage below their marginal product. Explore the wage markdown, deadweight loss, and how a minimum wage can raise employment.
Focus
The wage markdown, deadweight loss, and the minimum-wage result
See how a monopsonist marks the wage down below the marginal product, and how a minimum wage between the monopsony and competitive wage raises both employment and pay.Interactive diagram
Monopsony — explore it instantly
How to read this
A monopsonist is the only buyer of labour, so it faces the whole upward labour supply curve. To hire one more worker it must raise the wage for everyone, so its marginal cost of labour lies above supply and rises twice as fast. The firm hires where marginal cost of labour meets marginal revenue product — its demand for labour — then pays only the wage on the supply curve at that employment, below the marginal product. That gap is the wage markdown.
Compared with the competitive outcome — where the wage equals marginal revenue product — the monopsonist employs fewer workers at a lower wage. The shaded triangle between the two is deadweight loss.
A minimum wage flattens the marginal cost of labour at the floor. Set between the monopsony and competitive wage it raises both employment and pay — the counterintuitive monopsony result. Set above the competitive wage it cuts employment and creates unemployment, like a floor in an ordinary market.
Core ideas
Interpret the mechanics before you chase the graphs.
- Marginal cost of labour lies above supply and rises twice as fast for a linear supply curve.
- A monopsonist employs fewer workers and pays below their marginal product.
- A minimum wage between the monopsony and competitive wage raises employment; above it, it causes unemployment.
Learning goals
What this model should help students internalize.
- Find a monopsonist's employment and wage from marginal cost of labour equals marginal revenue product.
- Measure the wage markdown — the gap between the wage and the marginal product.
- Show how a minimum wage can raise employment under monopsony, then cut it above the competitive wage.
Prerequisites
Concepts to review before diving in.
- Linear labour supply and demand (marginal revenue product)
- Marginal versus average cost intuition
Next models to study
Keep moving through the track.
Intermediate firm theory
Monopoly and Deadweight Loss
Compare a monopolist's price and output to the competitive benchmark, and read off profit and deadweight loss as you reshape demand and cost.
Advanced microeconomics
2x2 Normal-Form Game
Change payoffs to see how best-response maps, equilibrium outcomes, and strategic tension shift across familiar 2x2 games.