Economics of Market Structures, Labor, and Inequality
Module 1: Market Structures, Pricing & Monopsony
Market Structures
Market structure defines the competitive environment in which firms operate, determining pricing, output, and profit potential.
- Perfect Competition: Many firms, identical products, free entry, price takers, P = MC, markup = 0, zero long-run profit. HR focus: efficiency, limited wage flexibility.
- Monopolistic Competition: Many firms, differentiated products, low entry barriers, P > MC, small short-run profits, excess capacity. HR focus: training, branding, customer service.
- Oligopoly: Few dominant firms, high entry barriers, strategic interdependence, P > MC, sustained profits, game theory applies. HR focus: talent competition, higher wages.
- Monopoly: Single firm, unique product, strong barriers, price maker, P >> MC, maximum sustained profit, deadweight loss. HR focus: capacity for above-market wages.
Sources of Market Power
Incumbent advantages: Pre-commitment contracts, switching costs, patents, copyrights, learning curve effects, brand/network effects.
Structural barriers: Economies of scale, excess capacity, high capital requirements, government regulation.
Markup and Profit Maximization
The profit-maximizing rule is MC = MR. Markup is calculated as (P − MC) / MC. Firms with market power face downward-sloping demand (MR < P); more elastic demand results in a smaller markup.
Comparative Statics
- Input costs ↑ → P ↑, Q ↓
- Demand ↑ → P ↑, Q ↑
- Entry ↑ → P ↓, Q ↑
- Technology improves (MC ↓) → P ↓, Q ↑
Monopsony and Labor Market Power
A monopsony is a single employer with labor market power. It faces an upward-sloping labor supply, meaning it must raise wages for all workers to hire one more (MCL > W). The hiring rule is VMPL = MCL. Outcomes include lower wages, lower employment, deadweight loss, and wealth transfer from workers to the firm. Minimum wage in a competitive market causes unemployment, but in a monopsony, it can increase both wages and employment.
Policy Developments (2024–2025)
The FTC non-compete ban was struck down (Aug 2024) and abandoned (Sep 2025). The worker classification rule was removed (May 2025). Pay transparency is expanding, and antitrust policy now considers labor market concentration.
Module 2: Economic Statistics
Key Indicators
- GDP: C + I + G + (X − M). Nominal GDP ≈ $29T; GDP per capita ≈ $86K; average growth ≈ 3.21%.
- Inflation: Measured by CPI (consumer goods) or GDP deflator (all goods).
- Labor Market: Participation ≈ 62.7%; average unemployment ≈ 5.67%. Types: cyclical, structural, frictional, seasonal.
- Wealth & Inequality: Total net worth ≈ $167T. Wealth distribution: Top 0.1% (13.5%), Top 1% (30.1%), Bottom 50% (2.5%). Gini coefficient: Income ≈ 0.48, Wealth ≈ 0.85.
Module 3: Production & Firms
Production is defined by Q = f(L, K). The Value of Marginal Product of Labor (VMPL) is MPL × P. Firms hire until VMPL = W. Automation acts as a substitute for low-skill labor and a complement to high-skill labor. Firms should enter if NPV > 0 and exit if future profits < asset value, ignoring sunk costs.
Module 4: Income & Inequality
Inequality is driven by union decline, technology, globalization, and market concentration. Education correlates with higher wages and lower unemployment. Significant gaps persist: women earn ~80.7% of men, and racial disparities remain prevalent. Discrimination is analyzed via regression, resume studies, and behavioral experiments.
Module 5: Oligopoly & Game Theory
Oligopolies involve strategic interaction. Key concepts include:
- Nash Equilibrium: Players choose the best response; no incentive to deviate.
- Prisoner’s Dilemma: Both firms choose a low-price strategy, leading to suboptimal profits.
- Repeated Games: Strategies like Tit-for-Tat or Grim Trigger allow for long-term cooperation.
- HHI: Sum of squared market shares. Values > 2500 indicate high concentration (U.S. average ≈ 4378).