Monopsony Lesson aims: To understand the main assumptions of a monopsony To draw and interpret equilibrium price and output under monopsony To explain the costs and benefits of monopsonists to consumers and firms

Recap: What is monopolistic competition? What are the main assumptions of a monopolistically competitive market? What examples of monopolistically competitive markets are there? Why is the demand curve elastic? Why can firms in monopolistic competition not earn supernormal profits in the long run?

Monopsony – Assumptions Only one buyer in the market Sellers in the market cannot sell their products to other firms outside the market As profit maximisers, they want to minimise costs by paying their suppliers the lowest price possible

Monopsony – Examples Network rail are the only purchasers of certain rail equipment and maintenance The vast majority of teachers are ‘bought’ by The Government Some shops and companies are the sole (or main) buyer of a number of products and/or services, e.g. crops

Monopsony – Equilibrium price and output We would expect the price and quantity to be at the equilibrium (Po-Qo); The monopsonist wants to buy at a lower price (P1); The equilibrium price and quantity is therefore lower than in a competitive market Read p.337-338 and Fig.1 – Draw Fig.1 and write an explanation

Monopsony power video

Costs and benefits/Bilateral monopoly How will the following be affected in a monopsony?: The monopsonist Suppliers Customers A bilateral monopoly is where there is only one buyer and one seller in a market; This is where a single buyer meets a single seller This should be more allocatively efficient, as there would be higher prices, as well as supply and demand – why?

1. Read Applied Economics ‘Supermarkets as monopsonists’ case 2 1. Read Applied Economics ‘Supermarkets as monopsonists’ case 2. Complete Supermarkets questions, p.341-342

So… What is a monopsony? What are the main assumptions of a monopsony? Why is the market price lower than in a competitive market? What are the costs and benefits? What is a bilateral monopoly?