Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
Competitive buyer firm and workers monopoly: 
Let us now analyse a situation in which the firm faces 
perfect competition both in the product and labour markets; only 
workers are organised in a union which acts like a monopolist 
seller. In Fig. 4.7,
S
L
curve shows the marginal cost to the union of 
supplying labour. 
D
L
is the market demand for labour. This is the aggregate 
VMP
L
curve derived from the summation of individual demand 
curves. D
L
is also the average revenue curve for the workers' 
union. From this is derived the marginal revenue (MR
s
) curve of 
the union. The market wage rate will depend on the aim of the 
union. Although the worker's union can persue several objectives, 
we shall discuss only the following three: 
1.  Maximisation 
of 
employment 
The 
maximum 
level 
of 
employment is defined by the intersection of the demanded supply 
curve. This is point E in Fig. 4.7.
The workers union will thus 
demand a wage equal to OW. The firms, being faced with perfect 
competition both in the commodity and labour market, are price-
takers and not price-makers. They will accept OW wage rate and 
maximise their profits by equating OW to the value of the marginal 
product of labour, VMP
L
. Thus the total employment will be OL 
and this is the maximum, which can be achieved. 
2.  Maximising total wage-bill. If the aim of the union is to maximise 
the total wage bill, it must set the wage at the level at which the 
marginal revenue to the union (MR,) is zero. In Fig.
4.7,
the 
equilibrium of the union is at point E'. The union will set a wage 
equal to OW and the level of employment will be OL'. Note that at 
this level of employment, the marginal revenue to the union is 
zero. 
3. Maximising total gains to the union as a whole. In order to 
maximise total gains to the union as a whole, the workers' union 
should set the wage at that level where marginal revenue to the 
union are equal. This is the point E" in Fig. 4.7.
The wage-rate will 
be OW" and level of employment QL". 
Are union members better off ? 

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