Equilibrium Under Imperfect Competition ill lite Factor Market
Wc have analysed above conditions of equilibrium in a factor market under perfect competition. But wc know that in the real world. perfect competition docs not prevail. The real world of imperfect competition. Wc shall now see how a firm reaches a state of equilibrium under imperfect competition in respect of the quantity of the factor employed and the price paid for it.
We shall take here an extreme case of imperfect competition, i.e., monopsony. in which there is only a sole purchaser of a factor, i.e.. a sole employer and no ne to compete with him, i.e.. thcre is none else who needs that factor. Unlike under perfect competition, here the employer has control over the price he pays for the factor. say, wage. i.e., he can raise it or lower it as it suits him, for there is no fear of competition from any other employer. If he needs more labour, he will have to pay a higher wage. Hence, the average wage curve AW will rise upward from left to right and the marginal wage curve MW will be above it. In the diagram . ARP is the average revenue productivity curve and MRP the marginal revenue productivity curve, In this case, the firm will he equal to the marginal revenue productivity (MRP). This is at the point E, because it is here that MW and MRP curves intersect. In this equilibrium position. we see that the average wage OW (= NP) i~ less than marginal revenue productivity MRP which is EN in this diagram, This Means that the labour gives to the employer more than the wage the employer pays him.
In other words, he is exploiting labour. This is known as monopsonistic exploitation, It is natural that, when there is no competition and the employer enjoys a monopoly of purchasing a factor, he must pay as little as possible. Hence, under imperfect competition, labour will usually he exploited the equilibrium position.