6.1.11

Monopsony

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Monopsony

A monopsony is a market where one firm purchases all the supply in a market. A common case study is a situation where one firm dominates the hiring in the market.

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Monopsony power

  • In a perfectly competitive labour market, a firm will hire where supply is equal to the marginal revenue product (MRP).
  • A monopsony employer looking to maximise profits will hire labour at the point where the MRP is equal to the marginal cost.
  • At this point, the wage is lower than under a perfectly competitive labour market.
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Marginal and average cost

  • At each wage, the number of workers willing to work is shown by the average cost curve.
  • Marginal cost is above average because they have to attract new workers with the prospect of a higher wage, while also paying existing staff more to compensate.
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Conditions needed for monopsony

  • For a firm to have monopsony power, there must be one buyer and many sellers.
  • The monopsony buyer will be a price setter or wage setter.
  • Amazon may have buying power with books and companies like Nokia which dominated the Finnish economy may have some monopsony power.

Trade Unions in a Monopsony

A trade union could act as a minimum price in a monopsonistic market. This could increase wages & workers' welfare.

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Equilibrium at A in monopsony

  • At the beginning, the firm hires labour at wage 1.
  • It hires workers up to the point where MC=MRPL and employment is Le
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Trade union created

  • The creation of a trade union would change the shape of the labour supply curve to the red line.
  • The creation of a trade union would change the shape of the marginal cost curve to the blue line.
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New equilibrium at B

  • To maximise profits, the firm now hires workers at point B, with a quantity of Qc. Wages rise to wc.
  • This is because the optimal quantity of workers hired is where the MC curve crosses the MRPL curve.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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