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๐Ÿ’ธย  Unit 1: Basic Economic Concepts

5.4 monopsony Markets

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โฑ๏ธย ย 2 min read

written by

jeanne stansak

November 15, 2020


Unit 5: Factor Markets

5.4: Monopsonistic Markets

The second type of factor (resource) market is called a monopsony. A monopsony is an imperfectly competitive factor market where only a single firm buys resources.

Characteristics of Monoposonies

  • One, large firm hires all workers in a single labor market and is large enough to control the labor market.
  • The market is imperfectly competitive.
  • The firm is a wage maker.
  • Firms must increase wages in order to hire additional wages.
  • MRC > wage per worker (This is because when you hire an additional worker, you must pay them a higher wage than the previous worker. However, you cannot wage discriminate, so you not only have the additional cost of that worker, but also the cost of bringing all the earlier workers up to the current wage rate).
  • The firm will hire the quantity of labor where MRP = MRC.
  • The firm will pay workers a wage that they are willing and able to work for below their MRP.

Differences between a Perfectly Competitive Labor Market and a Monopsony

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-AmGGsAEV4coK.png?alt=media&token=21adfaea-279d-4b02-a1b2-fb3b814b8629

Graphing a Monoposony

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-nnq2kztKJikD.png?alt=media&token=80b9ec09-0cbb-4768-b057-7ce05444ac04

In a monopsony, we determine the number of workers by finding where MRP = MRC and then going down to the horizontal axis. We determine wage by finding MRP = MRC and then going down to the supply curve and over to the vertical axis.

Sample Problem

There is 1 large hospital in a city that hires nurses. There are no other hospitals nearby that nurses are willing or able to travel to. What is the labor cost for this firm based on the graph?

  • Answer

    • $360

  • Explanation

      Since the large hospital is the only firm hiring nurses, we know that this is a monopsony. Monopsonistic firms hire the quantity where MRP = MRC, but only pay the wage level where the quantity intersects the labor supply curve. Therefore, we know that the equilibrium wage is $12 and the equilibrium quantity is 30. To find our total labor costs for nurses, we simply multiply the wage by the quantity ($12 x 30 = $360).

      https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-ICF1FlGC6Am3.png?alt=media&token=8ca28cb6-18fe-4d85-9cb8-3b5abf8d6065

    Graph for Large Hospital Hiring Only Nurses

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