What determines the behaviour of firms? 3.14 Operational Strategies: location What determines the behaviour of firms?

Candidates should be able to: Syllabus Candidates should be able to: Define monopsony and analyse its characteristics Assess the necessary conditions for a monopsony to operate. Evaluate costs and benefits to firms, consumers, employees and suppliers

Sometimes it is called a buyer’s _____________. Definition A monopsony occurs when __________ comes from one ____________, there is only __________ buyer in the market. Sometimes it is called a buyer’s _____________. demand, monopoly, one, source

Examples: there are very few pure monopsonists 3.14 Operational Strategies: location Examples: there are very few pure monopsonists People have accused Ernest and Julio Gallo (the big wine makers) of being a monopsony. They had such power buying grapes from growers, that sellers had no choice but to agree to their terms. What type of integration may lead to a monopsony?

Characteristics of monopsony What will the monopsonist maximise? What do they aim to minimise? How? Monopsonists will pay _________ prices to suppliers than if the market was competitive but suppliers will also supply _________ to the market

Implications of monopsony The monopsonist will affect the _________ of a good. The price is pushed down near the _________ of production. Why won’t the price be zero? What will happen to output quantity? The reduced cost will increase the _________ margins of the monopsonist. What happens to consumer surplus? Producer surplus?

Benefits of monopsony Firms: Consumers: Employees: Suppliers:

Costs of monopsony Firms: Consumers: Employees: Suppliers:

What can producers do when facing a monopsony?

Multiple choice question 1 Monopsony power is the ability of a: monopolist to purchase a good for a lower price than a firm in a competitive market. buyer to affect the price of a good and purchase it for a lower price than would prevail in a competitive market. seller of a key resource to sell it for a higher price than would prevail in a competitive market. buyer to purchase in volume and so receive a discount from the competitive market price.

Multiple choice question 2 Producer surplus is reduced with monopsony because: market output is lower than with perfect competition, and so producer surplus is lost as a result of the lost output. price is lower than with perfect competition and so producer surplus is reduced and consumer (buyer) surplus is increased. market output is higher than with perfect competition but prices are lower so consumer (buyer) surplus is increased and producer surplus is reduced. Both (A) and (B)