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Monopsony

Economics: Edexcel A A Level, topic 6.1.11

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.

Monopsony power

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.
Marginal and average cost

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.
Monopsony labour market visually

Monopsony labour market visually

Conditions needed for monopsony

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.

Equilibrium at A in monopsony

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
Trade union created

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.
New equilibrium at B

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.
New equilibrium

New equilibrium

Test yourself on Monopsony

  • What is a monopsony employer?

  • Which of the below is most likely to be a monopsony buyer in the international book market?

  • The creation of what, changes the shape of the labour supply curve and the marginal cost curve?

  • The optimal quantity of workers is shown by the intersection of the MRPL curve and which other curve?

  • What could the trade union act as in a monopsonistic market?

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