1. 1 Monopsony Monopsony is a situation where there is one buyer – you have seen Monopoly, a case of one seller. Here we want to explore the impact on the market when there is only one buyer of labor.

2. 2 Up to now in our studies we have assumed -firms are price takers in the output market – meaning the price is set in the market by the interaction of many buyers and sellers and then any one firm just works with the market price, -firms are wage takers in the input market – meaning the wage is set in a market setting as well. Here we have the situation of a single buyer of labor and because of this the firm has the ability to set the wage instead of take the wage. Let’s start with a nondiscriminating monopsonist. Recall that suppliers of labor have an upward sloping supply of labor curve (ignoring the backward bending case). In fact we take as given the market supply of labor as the sum of the labor supply from many individuals. On the next slide I have an example.

3. 3 $ L WageQs 4 0 5 1 6 2 7 3 8 4 1 2 3 4 87658765 S In this example the suppliers of labor will supply a q of 1 when the wage is 5, and so on.

4. 4 $ E WageQsTLCMRC 4 0 0 xxx 5 1 5 5 6 2 12 7 7 3 21 9 8 4 32 11 1 2 3 4 87658765 S A nondiscriminating monopsonist has to pay all the workers hired the same amount. TLC is the total labor cost (just the wage times the Qs) and MRC is the marginal cost of labor (the change in TLC divided by the change in labor supplied Qs). MRC

5. 5 Note, in order to get two units of labor the firm would have to pay 12  6 to each worker. But the first worker would have worked for 5. So the marginal cost to the firm of the second worker is 7, which is the 6 to get the second worker but includes the 1 you give to the first worker. A similar story holds for all future units of labor. The point here is that from the point of view of the firm the MRC curve is not the supply of labor curve. The MRC curve is above the supply of labor curve. The MRC curve is the curve that shows the change in total labor cost from having additional units of labor. The curve will be used to think about how much labor the firms would want to hire. The other piece of information here is to remember that the demand for labor curve is the marginal revenue product of labor curve. It deals with the revenue of additional workers.

6. 6 Employment or hiring decision by the firm The profit maximizing nondiscriminating monopsonist will hire labor up to the point where the marginal revenue product equals the MRC. Recall the marginal revenue product is the revenue generated by the additional worker. The wage paid to each worker is the wage on the supply curve at the optimal quantity. On the next screen I have the result in a graph.

7. 7 $ L S MRC MRP = D W1 L1

8. 8 The firm on the previous screen does not want to go past the employment level where the MRP = MRC because those workers would bring in less revenue than the cost to hire them and thus the firm would lose out on some profit. Plus the firm would not want to stop short of this point because they would not take units of labor where the revenues of the labor are greater than the costs of taking the labor. On the next slide we compare the result of monopsony with that of competition. In competition the wage and quantity traded occur where the supply and demand are equal.

9. 9 $ L S MRC MRP = D W1 L1Lc Wc

10. 10 The monopsony pays a lower wage than in competition and hires less labor. Remember a monopsony is a single buyer of labor. Often in economics we see that if the demand or supply side of the market has only 1 player then the single actor has market power. The market power often results in less than desirable outcomes. Here the single buyer uses power to pay lower wages and thus fewer folks want to work at that low wage. The monopsony likes this outcome better than competition but not everyone else. Workers get lower wages and less work and since less labor is desired less output is made – output people probably want.

11. 11 Note here that the monopsony pays the workers less than their MRP –> W <MRP. In this sense it has been said the monopsony exploits the workers.