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AD CURVE: The aggregate demand curve, which is a graphical representation of the relation between aggregate expenditures on real production and the price level, holding all ceteris paribus aggregate demand determinants constant. The aggregate demand, or AD, curve is one side of the graphical presentation of the aggregate market. The other side is occupied by the aggregate supply curve (which is actually two curves, the long-run aggregate supply curve and the short-run aggregate supply curve). The negative slope of the aggregate demand curve captures the inverse relation between aggregate expenditures on real production and the price level. This negative slope is attributable to the interest-rate effect, real-balance effect, and net-export effect.

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Lesson 23: Factor Market Equilibrium | Unit 4: Monopsony Page: 18 of 24

Topic: Efficiency <=PAGE BACK | PAGE NEXT=>

  • The primary condition for profit-maximization AND efficiency derived from the analysis of the firm's labor employment is:

  • MRP = MFC > W
  • As such, marginal revenue product (MRP) is also greater than the factor price (W).

  • This means the market is NOT efficient.

  • Consider the profit-maximizing employment of labor services illustrated in this diagram.

  • Clearly wage paid in monopsony is lower and the quantity of factor services employed is less.

  • The conclusion is that monopsony, like it's selling counterpart monopoly, is NOT efficient.


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MARGINAL COST AND LAW OF DIMINISHING MARGINAL RETURNS

Decreasing then increasing marginal cost, reflected by a U-shaped marginal cost curve, is the result of increasing then decreasing marginal returns. In particular the decreasing marginal returns is caused by the law of diminishing marginal returns. As such, the law of diminishing marginal returns affects not only the short-run production of a firm but also the cost of short-run production. This translates into a positively-sloped supply curve for profit-maximizing competitive firms.

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