Question

Define monopsony. What does it mean to have monopsony power? Illustrate graphically a monopsonist in the labor market. In your graph, depict the difference between the quantity hired by the firm exhibiting monopsony power and what the market would look like if it were competitive.

Answer 1

Monopsony is a situation where there is only one buyer while a large number of sellers in the market. It is quite prominent in the labour market. Suppose there are one big employer and a large number of workers who are in the queue to gain employment. Being the only employer in the market, it has special powers just like what monopolist has in the goods market. A monopsonist can choose to decide the lower wages along with the number of workers he would like to employ. Example, a coal miner in an are where the coal mines are the only or primary source of employment.

In the graph, D is the demand curve which is equal to the marginal product of labour. S is the supply curve while Mc is the marginal cost of hiring the labour. in case of monopsony, the equilibrium will be where the MPL=Mc, the corresponding equilibrium wage is W2 and the amount of labour will be L2. If it would have been a perfect competition, the equilibrium would be at the intersection of demand and supply, the corresponding equilibrium wage will be W1(higher wages) and the labour employed will be L1(more employment).