Question

A monopsonist/monopolist is the only buyer/seller of a particular variety of apples. Show graphically: the price paid to farmers (buying price), the selling price, the monopsonist’s profit, the farmers surplus loss (compared to selling in a perfectly competitive market).

Answer 1

In a monopoly, there is a single seller who determines the selling price. In a perfect competition, there are large number of buers and sellers and thus, no single fitm can determine the price of the apples sold. Thus, monopolists are able to make supernormal profits whereas in perfect competition, all the sellers make zero profits. In monopoly, profit is maximized when MR=MC which is less than the price of the product. In this case, the farmer's surplus is more than selling in a perfectly competitive market as they make higher profits.

Under monopsony, since there is a single buyer, they can influence the price of the apples that will be sold by the farmers. The farmer's surplus is lost due to lower price paid by the monopsonist than compared to the price determined by forces of demand and supply in a perfectly competitive market.