Short on time? This page is the recap. For explanations, the graph and worked examples, use the full study guide.
Recap
- A monopsony is the single (or dominant) buyer of a type of labour. Workers have few other employers to go to.
- It faces the upward-sloping market supply of labour, so it is a wage setter: to hire more, it must offer a higher wage.
- With one wage for all, an extra worker costs their wage plus the raise to all existing workers, so MRC > W.
- It hires where MRC = MRP and pays the wage on the supply curve at that quantity.
- Compared with a competitive labour market, it hires fewer workers at a lower wage, and the wage is below MRP. The result is inefficient: there is a deadweight loss.
Key relationships
| Relationship | How to use it |
|---|---|
| TLC = W × L | Wage from the supply schedule × number hired |
| MRC = ΔTLC ÷ ΔL | Always above the wage after the first worker |
| MRC = new wage + (raise × existing workers) | Quick check on a table |
| Linear supply W = a + bL → MRC = a + 2bL | Same intercept, twice the slope |
| Hiring rule: MRC = MRP | Gives Lm |
| Wage: from S at Lm | Gives Wm, below MRC and MRP |
| Competitive outcome: S = MRP | Gives Lc > Lm and Wc > Wm |
| DWL = ½ × (MRP − W at Lm) × (Lc − Lm) | For straight-line curves |
Graph checklist
- Axes: wage ($ per period) and quantity of labour.
- S upward; MRC above S, steeper, same vertical intercept; MRP = D downward.
- Lm below MRC = MRP; Wm on S at Lm; competitive point where S crosses MRP.
Mistakes to avoid
- Reading the wage at the MRC = MRP point instead of from the supply curve.
- Drawing MRC below S, or parallel to it.
- Saying the monopsony hires more workers than a competitive market.
- Mixing up monopsony (one buyer) with monopoly (one seller).
- Forgetting the raise for existing workers when calculating MRC from a table.
Quick self-check
- 10 workers will work for $15 an hour; 11 workers need $16. What is the MRC of the 11th worker? (11 × 16 − 10 × 15 = 176 − 150 = $26.)
- Where does a monopsony read its wage? (From the supply curve, at the quantity where MRC = MRP.)
- Why is the monopsony wage below the competitive wage? (It hires fewer workers, and fewer workers will work for a lower wage on the upward-sloping supply curve.)
Next: practice questions.