Now let's discuss the opposite of a monopoly. It's called a monopsony. This is a pretty weird topic, but let's check it out. So instead of a market with a single seller, like a monopoly where they're the only one selling a good, this is a market with a single buyer. This is pretty rare, but it comes up in cases of labor markets sometimes where there is only one firm that is hiring workers. So sometimes this comes up, maybe there's a small town somewhere that exclusively produces lumber, and the lumber company is the only firm that is hiring people in this small town to produce the lumber, or maybe some small town where a huge Walmart opened up, closed all the shops around, and everyone works at Walmart now. Right? So Walmart is the main employer in that town, and they are basically the only firm hiring, buying the labor in the area.
Monopsony acts very similar to a monopoly in that they're going to try and maximize profits. The Monopsony now, we're thinking about the cost side, where monopolies we're thinking about the demand for their good. Well, this is the demand that they have for the labor to produce their goods and stuff like that. So they're going to maximize profits by hiring a quantity of workers where the marginal cost of the labor equals the marginal revenue product of the labor. This is still that idea of marginal cost and marginal revenue except we're looking at it from the labor side. They're thinking about the cost of the labor in this case.
The marginal revenue product is what those laborers can produce, where the marginal cost is what it's going to cost to have those laborers. If you remember, when we were talking about labor in a competitive market, well, we had the wage equal the marginal cost of labor. There was this competitive wage and that was the marginal cost. No matter how many people you hired, that was going to be the cost of those hires. However, it's different in a monopsony. We're going to have a different marginal cost curve from our supply curve of labor. The marginal cost of labor is going to be greater than the wage.
How is the marginal cost greater than the wage in this case? Well, that's because hiring one more worker, the idea is that in a monopsony, if they're going to offer a higher wage, think about it. If they wanted to hire one more worker, they'd have to pay a higher wage, but by paying that higher wage to that worker, they're going to have to pay a higher wage to all the other workers. They're going to have to increase the wage for all employees by increasing the wage for this new employee. So all the employees are going to have to receive this new higher wage. A little interesting there, a little bit of a weird concept that only comes up in this situation, but let's go ahead and see how it works on a graph. Maybe it'll help you understand it a little better.
Here we're going to have our standard demand and supply of labor. This is our demand in this color. Our equilibrium wage in any market, in a competitive market, excuse me, would have been right here. Our equilibrium wage, so remember, this is price and quantity. Well, really instead of price, we say wages when we're talking about a labor market. So our equilibrium wage would have been right here, W star, and our equilibrium quantity, Q star, right there. However, the monopsony has power over this market. They're the only buyer, so they're going to be able to influence this market and be able to have the cost-minimizing point that they want to produce here.
What happens if they were at this point right here, let's say they were hiring at this point and they wanted to hire another worker? Well, that would increase the quantity, but remember how I said if they're going to increase the wage for one worker, they have to increase the wage for all the workers. So the workers that were being paid this wage down here, let's say, $1, now they're going to have to be paid $2. All of them are going to be paid $2. So not only do we have to pay the new worker more money, but the old workers more money as well. So the marginal cost of hiring a new worker is not just the higher wage for that worker but the higher wage for all the other workers as well. This leads us to have this steeper marginal cost curve over here. This is the marginal cost of the labor right here. The marginal cost of labor is going to be steeper because by hiring one more worker, we not only have to increase their wage but the wage of all our previous workers as well.
This leads us to our conclusion, where they're going to hire where the marginal cost equals the marginal revenue. Just as we're used to. Marginal cost equals marginal revenue, and remember that our demand curve, when we studied labor demand, that is based on the marginal revenue product. What those laborers can produce is going to be the firm's demand. The firm's demand for labor is based on what those laborers can produce for them. They're going to want to hire laborers up to the point that the marginal cost equals the marginal revenue. And just like we're used to, we'll find that point where the demand, the marginal revenue product equals the marginal cost, and that's going to be right here. That is the point where we're going to want to hire, but that's not the wage we pay. Because the wage we pay is going to be where the supply curve touches that point, so that's the only difference here. At this point where the marginal cost equals the marginal revenue, we're going to go down to the supply curve, and that's the wage we're going to pay right there.
The wage in a monopsony is going to be lower than the equilibrium wage. We've got a lower wage here, which we would expect because they have influence over the market. So the firm is going to want to pay a lower wage. This leads to a lower wage and a smaller quantity, just like when we studied monopolies and we saw the same effect from the selling side where they're going to restrict the output so that they sell less at a higher price. So it's the same thing flipped here. They're going to hire less at a lower price as well.
So we end up with a lower wage and a lower quantity. Let's pause here, and then let's talk about how minimum wage laws help the laborers in this market so that they don't get stuck with this lower wage and gives them a little more leeway in the market. Let's pause here. We'll discuss minimum wage laws next.
