What a monopsony is
A monopsony is a market with one buyer. In a labour market, it is a firm that is the only employer (or by far the largest employer) of a type of worker. Think of a single mine in an isolated town, or a hospital that employs almost every nurse in a remote region.
Its key features are:
- One employer of this type of labour in the market.
- Workers have few alternatives. Moving to another town or retraining for another job is slow or costly.
- The firm is a wage setter, not a wage taker. Because it is the whole market, the supply curve it faces is the market supply curve of labour, which slopes upward.
Compare this with Topic 5.3. A wage taker faces a horizontal supply line: it can hire more workers at the same wage. A monopsony faces the upward-sloping market supply. To attract more workers, it must raise the wage. In this topic we assume the firm pays the same wage to every worker it hires.
Why MRC is above the wage
The marginal resource cost (MRC), also called marginal factor cost, is the extra cost of hiring one more worker: change in total labour cost ÷ change in labour.
Suppose 3 workers will work for $70 a day each, but a 4th worker will only come for $80. Because everyone gets the same wage, the firm must also raise the 3 existing workers from $70 to $80. Hiring the 4th worker adds:
- the new worker’s wage: $80;
- plus the raise for the existing workers: 3 × $10 = $30.
So MRC = $80 + $30 = $110, even though the wage is only $80.
This is true for every worker after the first, so MRC > wage (the supply price of labour). On a graph, the MRC curve lies above the supply curve and rises more steeply. For a straight-line supply curve W = a + bL, the MRC line is MRC = a + 2bL: the same vertical intercept and twice the slope.
The hiring rule: MRC = MRP, then read the wage from supply
A monopsony still maximises profit by comparing the extra revenue and the extra cost of each worker:
- MRP > MRC: hiring the worker raises profit. Hire.
- MRP < MRC: hiring the worker lowers profit. Do not hire.
So it hires up to the quantity where MRC = MRP. This is the same rule as in Topic 5.3. The difference is that MRC is no longer equal to the wage.
The wage is then read from the supply curve at that quantity. The supply curve shows the lowest wage at which that many people will work, so there is no reason to pay more.
Two steps, in order:
- Quantity: go to where MRC = MRP, then down to the horizontal axis (Lm).
- Wage: from Lm, go up to the supply curve, then across to the vertical axis (Wm).
A common error is to read the wage at the MRC = MRP point. That point is above the wage.
Reading a monopsony graph
To draw the graph:
- Vertical axis: wage (and MRC, MRP) in dollars per period. Horizontal axis: quantity of labour.
- S: upward-sloping market supply of labour. This is also the firm’s average cost of labour per worker.
- MRC: above S and steeper, starting from the same point on the vertical axis.
- MRP = D: downward-sloping; it is the firm’s demand for labour.
- Mark Lm below the MRC = MRP point, and Wm on the S curve at Lm.
Monopsony compared with a competitive labour market
If the same labour market were perfectly competitive, the wage and quantity would be set where market supply meets labour demand, S = MRP (point Lc, Wc in Figure 1).
| Outcome | Monopsony | Perfectly competitive labour market |
|---|---|---|
| Hiring rule | MRC = MRP | MRC = W, so S = MRP for the market |
| Supply curve facing the firm | upward-sloping market supply | horizontal at the market wage |
| MRC compared with wage | MRC > W | MRC = W |
| Employment | lower (Lm) | higher (Lc) |
| Wage | lower (Wm) | higher (Wc) |
| Wage compared with MRP of last worker | W < MRP | W = MRP |
Why the monopsony stops early: workers between Lm and Lc have an MRP above the wage they would accept, so hiring them would create value. But to hire them, the monopsony would have to raise the wage for all its workers. That extra cost makes the hire unprofitable for the firm. The value those jobs would have created is lost: a deadweight loss, shown by the triangle between MRP and S from Lm to Lc. The monopsony’s outcome is therefore inefficient (you will study market inefficiency in Unit 6).
Worked example 1: Brackwater Mill hires weavers
Question. Brackwater Mill is the only employer of weavers in a remote valley. It pays all weavers the same daily wage. The table shows the wage needed to attract each number of weavers and each weaver’s MRP.
| Weavers | Wage needed ($ per day) | MRP ($ per day) |
|---|---|---|
| 1 | 50 | 125 |
| 2 | 60 | 120 |
| 3 | 70 | 115 |
| 4 | 80 | 110 |
| 5 | 90 | 105 |
| 6 | 100 | 100 |
| 7 | 110 | 95 |
(a) Calculate total labour cost (TLC) and MRC for each number of weavers. (b) How many weavers does the mill hire, and what wage does it pay? (c) What would the outcome be in a competitive labour market? (d) At the monopsony quantity, compare the last weaver’s MRP with the wage.
(a) TLC = wage × number of weavers. MRC = change in TLC.
| Weavers | Wage ($) | TLC ($) | MRC ($) | MRP ($) |
|---|---|---|---|---|
| 1 | 50 | 50 | 50 | 125 |
| 2 | 60 | 120 | 70 | 120 |
| 3 | 70 | 210 | 90 | 115 |
| 4 | 80 | 320 | 110 | 110 |
| 5 | 90 | 450 | 130 | 105 |
| 6 | 100 | 600 | 150 | 100 |
| 7 | 110 | 770 | 170 | 95 |
Check the 4th weaver: new wage $80 plus a $10 raise for 3 existing weavers = 80 + 30 = $110. ✓ This matches 320 − 210.
(b) Compare MRP with MRC. For weavers 1 to 3, MRP is above MRC. For the 4th, MRP = MRC = $110. For the 5th, MRP ($105) is below MRC ($130). The mill hires 4 weavers. From the supply schedule, 4 weavers will work for $80 per day, so that is the wage.
(c) In a competitive market, employment rises until the wage equals MRP. At 6 weavers, MRP = $100 = the wage needed. The 7th weaver’s MRP ($95) is below the $110 wage needed. So 6 weavers at $100 per day: more workers and a higher wage.
(d) At 4 weavers, MRP = $110 but the wage is $80. Each weaver is paid $30 less than the revenue the last one adds. The 5th and 6th weavers have MRPs ($105 and $100) above the wages they would accept ($90 and $100), but the mill does not hire them because their MRC ($130 and $150) is higher still.
Interpretation. The mill’s labour cost at 4 weavers is $320 against $470 of revenue from their MRPs (125 + 120 + 115 + 110), leaving $150 a day. At 6 weavers it would be $600 against $675, leaving only $75. Hiring fewer workers at a lower wage is more profitable for the mill.
Worked example 2: Dunmere Quarry with equations
Question. Dunmere Quarry is the only employer in an isolated town. Labour supply is W = 4 + 0.5L and the MRP of labour is MRP = 22 − 0.5L, where W and MRP are in dollars per hour and L is the number of workers.
(a) Write the MRC equation. (b) Find the monopsony’s employment and wage. (c) Find the competitive employment and wage. (d) Calculate the deadweight loss.
(a) The supply curve has intercept 4 and slope 0.5. MRC has the same intercept and twice the slope: MRC = 4 + L.
Check with total labour cost, TLC = W × L. At 12 workers, TLC = 12 × (4 + 6) = $120 per hour. At 13 workers, TLC = 13 × (4 + 6.5) = $136.50. The 13th worker adds $16.50, which is what MRC = 4 + L gives halfway between 12 and 13 (4 + 12.5 = 16.5). ✓
(b) Set MRC = MRP: 4 + L = 22 − 0.5L, so 1.5L = 18 and Lm = 12 workers. The wage comes from the supply curve: W = 4 + 0.5 × 12 = $10 per hour. At L = 12, MRC = MRP = $16, which is $6 above the wage.
(c) Set S = MRP: 4 + 0.5L = 22 − 0.5L, so L = 18 and W = 4 + 9 = $13 per hour. The competitive market would employ 18 workers at $13.
(d) The deadweight loss is the triangle between MRP and S from L = 12 to L = 18. Its height at L = 12 is 16 − 10 = $6; its base is 18 − 12 = 6 workers. DWL = ½ × 6 × 6 = $18 per hour.
Check. The monopsony outcome has a lower wage ($10 < $13) and fewer workers (12 < 18) than the competitive outcome, as it should. Figure 1 shows these numbers.
Background: a minimum wage in a monopsony
This section goes slightly beyond the topic’s core statements, but it uses the same tools and is a common extension.
Suppose Dunmere’s town sets a minimum wage of $13 per hour. Up to 18 workers are willing to work at $13, so the quarry can now hire any of them at $13: its MRC is a flat $13 up to 18 workers. It hires where MRP = $13, which is at L = 18. Both the wage (from $10 to $13) and employment (from 12 to 18) rise.
This only works within a range. A minimum wage of $12 also raises employment, to 16 (the number willing to work at $12). A minimum wage above $16 (the MRP at Lm) leads the quarry to hire fewer than 12. For example, at $18 the quarry hires only 8, where MRP = $18.
Common misconceptions
- “The monopsony pays the wage where MRC = MRP.” That point gives the quantity. The wage is read from the supply curve at that quantity, and it is lower.
- “MRC equals the wage, as in Topic 5.3.” Only for a wage taker. A monopsony must raise everyone’s wage to hire one more worker, so MRC > W.
- “Monopsony means one seller.” That is monopoly. Monopsony means one buyer.
- “A monopsony hires more workers to get them cheaply.” It hires fewer workers than a competitive market, which is how it keeps the wage low.
- “MRC and supply start at different points.” For a straight-line supply curve, they share the vertical intercept; MRC is twice as steep.
- “The monopsony’s demand curve is the MRC curve.” Its demand for labour is its MRP curve. MRC is a cost curve.
- “In a monopsony, workers are paid their MRP.” They are paid less than the MRP of the last worker hired.
Where this leads
This completes the factor markets unit. Next, Topic 6.1, Socially Efficient and Inefficient Market Outcomes, uses the idea of deadweight loss you met here to judge when markets produce the efficient outcome. For the wage-taker case, revisit Topic 5.3. Test yourself with the practice questions, then use the revision notes and the checklist to consolidate.
Quick questions
Is a monopsony the same as a monopoly?
No. A monopoly is a single seller; a monopsony is a single buyer. A firm can be both, either or neither. In this topic the firm is a single buyer of labour.
Why doesn't the monopsony pay the wage where MRC = MRP?
Because it does not have to. The supply curve shows the lowest wage at which that many workers will work. At the chosen quantity, the firm pays exactly that wage, which is below MRC and MRP.