A monopsony is a market structure in which there is only one single buyer in a given market. This can be in a labour market where there is only one single buyer of labour. For example the UK government dominate the market for hiring teachers and nurses and therefore can be seen as a monopsonist.
Characteristics of a Monopsony
As a monopsonist is the sole employer of labour within a given profession, they are wage makers. This is due to the fact that there are no other firms employing the same profession of worker and therefore offering more competitive wages.
Monopsonists will hire up to the point where marginal revenue product is equal to the marginal cost of labour. By employing workers up to this point they are able to maximize the amount of revenue that workers produce and therefore maximize their profits. Beyond this point the marginal cost of labour would be greater than the marginal revenue product and therefore overall profits would decrease.
Monopsony diagram in the labour market
Although a monopsonist has price making powers, they’re still confined to the laws of supply. This means that in order to increase the quantity of workers that they hire, they have to increase the wage rate that they offer. In addition to this, if the firm is to increase the wages for the next worker, they must do so for all the workers previously hired. As such the marginal cost of labour curve is greater than the average cost of labour curve. For example, to hire the first worker it may cost £5 per hour (the average cost of labour). However, if the firm wanted to increase the quantity of workers it had then they would have to increase wages. Therefore, they decide to hire a second worker, but instead pay them £10. Not only do they have to pay… Read more