Monopsony Markets
Paul Scott
10 min read
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Study Guide Overview
This study guide covers monopsony, a market with a single buyer. It explains key characteristics like Marginal Resource Cost (MRC) exceeding supply, the monopsonist's wage-setting power, and the impact on employment. The guide contrasts monopsony with perfect competition, provides graphing examples, walks through an AP exam problem, and offers practice questions and exam tips.
#Monopsony: The Single Buyer Advantage 💰
Hey there, future AP Micro ace! Let's dive into the world of monopsonies, where one buyer calls the shots. Think of it as the flip side of a monopoly, but instead of controlling the price of goods, a monopsony controls the price of resources, like labor. This is a concept that often pops up, so let's make sure you've got it down!
#What Exactly is a Monopsony?
A monopsony is a market where there's only one buyer for a resource, like labor, and many sellers. Imagine a small town with just one major employer – that's your classic monopsony. This sole buyer has significant market power to influence wages. It's all about that single demand-side power!
#Key Characteristics of Monopsonies
- Single Large Firm: One big company dominates the hiring scene. They're the only game in town for workers. 🏢
- Imperfectly Competitive: Unlike perfect competition, this market has unique rules where the firm has control over the wage.
- Wage Maker: The monopsony firm isn't a wage taker; it sets the wage, aiming for the lowest possible rate workers will accept.
- MRC > Supply: The Marginal Resource Cost (MRC) is greater than the supply curve (willingness to sell). This is because to hire another worker, the firm must increase the wage for all workers, not just the new one. 💡
- Hiring Rule: Firms hire labor up to the point where Marginal Revenue Product (MRP) = MRC, maximizing their profit. This is a
for factor markets.
- Wage Below MRP: Workers get paid less than their MRP because of the firm's market power. This is a critical difference from perfectly competitive markets.
Think of MRC > S like this: When a monopsony hires an extra worker, it's like a ripple effect. The firm has to pay that new worker a higher wage, but it also has to raise the wage of all the previous workers to match. This makes the cost of hiring that last worker (MRC) higher than the wage they're willing to work for (Supply).
#Monopsony vs. Perfectly Competitive Labor Market
| Feature | Perfectly Competitive Labor Market | Monopsony |
|---|---|---|
| Number of Firms | Many | One |
| Wage Control | Wage Taker | Wage Maker |
| Wage Rate | Market Determined | Below MRP |
| MRC vs Supply | MRC = Supply | MRC > Supply |
| Employment Level | Higher | Lower |
| Worker Exploitation | None | Yes, workers paid less than MRP |
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