5.5 Monopsonistic Markets

What is a monopsony?

A monopsony exists when there is a single buyer of a resource, most commonly labor. Because the firm is the only employer, it faces the entire upward-sloping labor supply curve and must pay higher wages to attract more workers. This gives the firm wage-setting power, unlike a competitive labor market where firms are wage-takers.

MRC lies above the supply curve

Since the monopsonist must raise wages to hire additional workers, the marginal resource cost (MRC) curve lies above the labor supply (S) curve. The firm hires where MRC = MRP (marginal revenue product), then looks down to the supply curve to find the wage it actually pays — a wage lower than MRP.

Underhiring and underpaying

Compared to a competitive labor market, a monopsonist hires fewer workers and pays a lower wage. This creates deadweight loss and a form of labor market inefficiency. Minimum wage laws, in this specific case, can potentially increase both employment and wages up to a point, unlike in competitive markets.

Key terms

Monopsony

A market structure with a single buyer of a resource (e.g., labor), giving the firm wage-setting power.

Marginal Resource Cost (MRC) in monopsony

Lies above the labor supply curve; rises faster than wage because hiring one more worker raises pay for all workers.

Monopsonist's hiring rule

Hire labor where MRC = MRP, then pay the wage found on the supply curve at that quantity.

Monopsony vs. competitive labor market

Monopsony results in lower wages and fewer workers hired compared to a competitive labor market.

Effect of minimum wage in a monopsony

A minimum wage set appropriately above the monopsony wage can increase both wages and employment, unlike in competitive markets.

Try an AP-style question

A monopsony is a market with…

1. many buyers and sellers
2. no buyers
3. a single seller of a good
4. a single buyer of a factor