--- title: "Monopsony Power | Principles of Economics" description: "Monopsony power is a buyer's ability to set wages below competitive levels in labor markets, shaping hiring, worker pay, and efficiency in Principles of Economics." canonical: "https://fiveable.me/principles-econ/key-terms/monopsony-power" type: "key-term" subject: "Principles of Economics" unit: "Unit 14" --- # Monopsony Power | Principles of Economics ## Definition Monopsony power is the ability of a single buyer, usually an employer, to influence wages and hiring in a labor market. In Principles of Economics, it explains why pay can stay below the competitive level even when workers are available. ## What It Is Monopsony power is a labor market situation in Principles of Economics where one employer, or a very small number of employers acting with similar power, can influence wages instead of simply accepting the market wage. The clearest version is a monopsony, where there is one major buyer of labor in a local market. That employer does not face a perfectly elastic labor supply, so hiring one more worker usually means raising the wage to attract more labor. That is the big difference from a competitive labor market. In perfect competition, firms are wage takers and can hire workers at the going wage. With monopsony power, the employer knows that paying a higher wage to attract additional workers can raise the cost of labor across the whole workforce, not just for the new hire. So the firm faces an upward-sloping labor supply curve and a marginal factor cost that rises faster than the wage. That changes the hiring decision. The monopsonist hires labor where Marginal Revenue Product of Labor equals Marginal Factor Cost, not where the wage equals the value of the last worker's output. Because MFC sits above the wage when wages have to rise to attract more workers, the employer hires fewer workers and pays a lower wage than a competitive market would produce. The result is lower employment and a deadweight loss compared with the competitive outcome. A simple example is a rural town with one large hospital, one factory, or one dominant retail chain. If workers have few other local options, the employer can keep wages lower because leaving means a long commute, relocation, or a different skill set. That is why job search costs, specialized skills, and geographic isolation matter so much in this topic. It also helps to separate monopsony power from monopoly power. Monopoly is about one seller raising prices to consumers. Monopsony is about one buyer pushing down wages paid to workers. The logic is similar, but the market side is different, and in this course the labor market examples are the main focus. ## Why It Matters Monopsony power shows why labor markets do not always behave like the simple supply and demand graphs you see in an introductory unit. It explains why two workers with similar productivity can face different pay depending on how many employers are competing for labor in their area. That makes it a useful tool for reading real labor market stories, not just drawing curves. This term also connects to policy debates. If a market has monopsony power, a minimum wage can sometimes raise both wages and employment, which sounds impossible under the perfect competition model but makes sense here. Labor unions, better mobility, and easier job search can also reduce employer power. So this concept helps you explain why some policies can improve outcomes in labor markets that are not competitive. In problem sets, you often use monopsony power to interpret a graph, identify where employment is set, or explain why the wage is below marginal revenue product. In discussion or essays, it gives you a clear reason why workers may earn less than their output seems to justify. It is a core idea any time the course asks you to compare market structures and predict who has bargaining power. ## Connections ### Monopsony Monopsony is the market structure behind monopsony power. The term describes a market with one dominant buyer of labor, while monopsony power refers to the buyer's ability to influence wages and employment. In a local labor market, the structure and the power show up together, but the power can also exist in markets that are not perfectly single-buyer in a strict sense. ### Marginal Revenue Product of Labor (MRPL) MRPL is the value of the extra output created by one more worker. In a monopsony, the employer still compares MRPL to cost when deciding how many workers to hire. The key twist is that the firm sets employment where MRPL equals marginal factor cost, so the wage paid to workers ends up below the value created by the last worker. ### Marginal Factor Cost (MFC) MFC is the extra cost of hiring one more unit of labor. Under monopsony power, MFC rises faster than the wage because paying more to attract one worker can require raising pay for others too. That is why the MFC curve sits above the labor supply curve and helps explain why the employer hires fewer workers than in a competitive market. ### [Minimum Wage Laws](/principles-econ/key-terms/minimum-wage-laws) Minimum wage laws can have a different effect in a monopsony than in a competitive labor market. If the wage floor is set above the monopsonist's chosen wage but below the competitive wage, it can push wages up and even increase employment. That makes this term a common policy connection when the course compares market structures. ## On the AP Exam A quiz or free-response style question may give you a labor market graph and ask you to identify where a monopsonist hires workers, or why the wage is below the competitive level. You might need to point out that the firm faces an upward-sloping labor supply curve and chooses employment where MRPL equals MFC. If the prompt asks about policy, explain whether a minimum wage or union changes wages, employment, or both in a monopsony setting. In a data or case question, look for clues like one dominant employer, high switching costs, or workers with limited mobility, then connect those features to lower wages and fewer jobs. ## Monopsony Power vs Monopoly Monopoly and monopsony sound similar, but they describe opposite sides of the market. A monopoly is one seller with market power over buyers, while monopsony is one buyer with market power over sellers, usually workers in a labor market. If a question is about prices to consumers, think monopoly. If it is about wages and hiring, think monopsony. ## Key Takeaways - Monopsony power means an employer can influence wages instead of taking the market wage as given. - In a monopsony labor market, the employer faces an upward-sloping labor supply curve and a rising marginal factor cost. - The firm hires labor where MRPL equals MFC, which leads to lower wages and fewer workers than a competitive labor market. - Geographic isolation, specialized skills, and high job-search costs make monopsony power stronger. - Minimum wage laws and labor unions can sometimes move wages and employment closer to a competitive outcome. ## FAQs ### What is monopsony power in Principles of Economics? Monopsony power is an employer's ability to set wages and employment below the competitive level because workers have limited alternatives. It shows up when a single buyer, or a dominant buyer, faces an upward-sloping labor supply curve. The firm can pay less than workers' marginal revenue product and still attract labor. ### How is monopsony power different from monopoly? Monopoly is one seller controlling the market for a good or service, while monopsony is one buyer controlling demand for labor or another input. Monopoly tends to raise prices for consumers, but monopsony tends to lower wages for workers. They are mirror-image market power problems. ### Why does monopsony power lower wages? Because the employer has to raise wages to attract additional workers, and that higher wage often affects more than just the new hire. The marginal factor cost rises faster than the wage, so hiring becomes more expensive as employment expands. That gives the employer incentive to hire fewer workers and pay less than a competitive market would. ### Can a minimum wage increase employment in a monopsony? Yes, it can. If the minimum wage is set above the monopsonist's chosen wage but below the competitive wage, the employer may hire more workers because the wage floor reduces the firm's ability to keep wages artificially low. That is one of the classic policy results tied to monopsony power. ## Related Study Guides - [14.2 Wages and Employment in an Imperfectly Competitive Labor Market](/principles-econ/unit-14/2-wages-employment-imperfectly-competitive-labor-market/study-guide/hSXtyT8EAz9mIYjB) ## About This Document Canonical Fiveable pages are available as Markdown at the same path plus `.md`. - [llms.txt](https://fiveable.me/llms.txt): index of Fiveable's sections and URL patterns - [llms-full.txt](https://fiveable.me/llms-full.txt): complete subject and unit listing - [MCP server](https://fiveable.me/mcp): call Fiveable as tools instead of fetching pages (`https://fiveable.me/api/mcp`) - [MCP server for AP teachers](https://fiveable.me/mcp/teachers): a teacher's classes, assignments and AP-rubric grading (`https://fiveable.me/api/mcp/teacher`) ## Structured Data ```json {"@context":"https://schema.org","@graph":[{"@type":"LearningResource","@id":"https://fiveable.me/principles-econ/key-terms/monopsony-power#resource","name":"Monopsony Power | Principles of Economics","url":"https://fiveable.me/principles-econ/key-terms/monopsony-power","learningResourceType":"Concept explainer","educationalLevel":"AP® / High School","about":{"@id":"https://fiveable.me/principles-econ/key-terms/monopsony-power#term"},"audience":{"@type":"EducationalAudience","educationalRole":"student"},"dateModified":"2026-07-03T02:24:05.230Z","isPartOf":{"@type":"Collection","name":"Principles of Economics Key Terms","url":"https://fiveable.me/principles-econ/key-terms"},"publisher":{"@type":"Organization","name":"Fiveable","url":"https://fiveable.me"}},{"@type":"DefinedTerm","@id":"https://fiveable.me/principles-econ/key-terms/monopsony-power#term","name":"Monopsony Power","description":"Monopsony power is the ability of a single buyer, usually an employer, to influence wages and hiring in a labor market. 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