Question

The market for wheat is supplied by a large number of small price taking firms.

a) Suppose there is only one large buyer (a Monopsony). How will the price, quantity,

PS, and CS differ from the case of a perfectly competitive market?

b) Suppose that the majority of wheat is used by firms that produce bread. How will the

wheat market be affected if the local bread market is supplied by a Monopoly.

c) How would the market for wheat be affected if the government placed a price ceiling

in the market for bread.

Answer 1

a) As we know, in a monopsonic market, a single buyer is bestowed with the buying power, hence they use it to their advantage to the fullest: They set the prices at a lower level than the competitive market and buy large quantitites. Prominent examples include Mining companies which dominate the labour market due to their presence in a certain geographical location.

b) So, in the wheat market is monopsonic in which the bread market is the lone buyer. And if the bread market is supplied as a monopoly, it means that it is the only supplier in the market, which implies that the wheat market will hit a heavy loss due to the extensive disruption of prices shifted to much lower than the equilibrium price.

c) In case of government intervention, we can expect a healthy competitive market to be reestablished. That is the profits are set to a certain limits, thereby protecting the rights of the consumers. The market of wheat will face a sharp dip in prices since the bread market needs to maximize its profits, and the latter is bestowed with the perk of being the only buyer of wheat and can disrupt the prices further in the wheat market.

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