Monopsony
Let’s Review Factors
• Factors- Machines, Labor – continuous input.
• Wage rate set by labor supply and demand
• Firms and employees are wage takers, not wage
setters.
• Marginal Resource Cost- Cost of an additional worker
• Marginal Revenue Product- the additional revenue
created by the additional worker (Price of product
times Marginal Product of Labor
2
Let’s Review Factors
• A firm will produce until MRP=MRC
• In Perfect Competition:
• MRP=Demand
• MRC=Supply
3
Side-by-side graph showing
Market and Firm
SL
Wage
Wage
SL=MRC
WE
QE
Industry
DL
Q
DL=MRP
Qe
Firm
Q
Monopsony
• One buyer of labor
• When does this occur?
• Their supply curve is the
industry supply curve.
• One firm is now a wage setter
(factor cost setter) instead of
wage taker (factor cost taker)
5
Examples of Monopsony
• Mining Companies in mining
towns
• The US Military
• Walmart in small towns?
6
WageWage Qs
Quantity
4
0
5
1
6
6
2
2
7
7
3
3
8
8
4
4
4
5
$
0
1
S
8
7
6
5
1 2 3 4
L
In this example the suppliers of labor will supply a q of 1 when the wage
is 5, and so on.
7
Wage
Wage
Qs TRC
Quantity
4
0
0
5
1
5
6
2
12
4
0
5
1
6
2
7
3
7
3
8
48
4
MRC
Total Resource
Cost xxx
Marginal
Resource Cost
0
N/A
5
12
21
21
3232 11
5
7
9
$
MRC
5
S
7
9
11
8
7
6
5
1 2 3 4
E
Marginal Resource (labor) Cost is now different than labor supply , it’s
higher!
Meaning the employer can gain additional workers at additional cost.
The employer can choose the wage rate!
8
Where would a monopsony produce
• Quantity-MRP=MRC
• But what wage would
people be willing to
accept at that quantity
• The monopsonist will
move down to the
supply curve- hiring
fewer people at a
lower wage – creating
deadweight.
9
Monopsony- Inefficient Labor Market
• Deadweight created
• Fewer jobs at lower wages