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Economics

Study Notes

Monopsony Power in the Labour Market

Level:
A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

A monopsony occurs when there is a sole or a dominant employer in a labour market.

This means that the employer has buying power over their potential employees. This gives them wage-setting power in the industry labour market.


Monopsony is a potential cause of labour market failure. For a monopsony employer, the supply curve of labour equals the average cost of labour. The monopsony employer will have to bid up wages in order to attract new workers.
But the wage they pay will not necessarily be equal to the true marginal revenue product of people they have employed

Analysis of monopsony power when setting wages

Profit maximising employment level is where MCL=MRPL i.e. E2 number of people are employed
Their marginal revenue product is valued at W2
Monopsony power of the employer allows them to pay a wage rate W3

Monopsony employer can use their buying power to pay a wage lower than the value of the marginal revenue product of workers employed at E2
Monopsony power can therefore lead to exploitation of employed workers

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