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MONOPSONY
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
Assume we are dealing
buyer of labor in the local
curve for labor is the
definition. The demand for
for the monopsonist.
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with a monopsonist who is the sole
geographic market. The market demand
monopsonist’s demand for labor by
labor is driven by the MRP of labor

Assume also that the market for the monopsonist’s output is
perfectly competitive. He can sell as much output as he wants at
prevailing prices.

The monopsonist faces an upward sloping supply curve. (More
people enter the workforce at higher wages, and for those already
employed, the cost of taking an additional hour’s leisure is
effectively more expensive – so workers choose to work longer
hours).

Since the supply curve for labor is upward sloping, if the
monopsonist wants to purchase labor at a lower price, he must buy
less – i.e. move down the supply curve.
(This is directly
analogous to the monopolist who, if he wants to sell more, must
lower price since demand is downward sloping). Equivalently, if
he wants to buy more labor, he must pay a higher price for all
units (no price discrimination).
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
Each additional unit of labor that the monopsonist buys
raises the price of all units he buys since additional units of
the good are only offered at higher prices and there is only a
single price for all units sold. Thus, the monopsonist’s marginal
expenditure (ME) lies above the supply curve.
(Again, this is
directly analogous to the case of the monopolist whose MR curve
lies beneath the Demand curve).

The profit maximizing quantity of labor occurs when the
additional expenditure on labor (ME) is equal to the additional
revenues produced by that labor (MRP).
Note that the resultant
wage is lower and quantity lower than if the demand for labor had
been competitive.
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