Monopsony — Edexcel A-Level Economics A
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Monopsony explained
A monopsony exists when a single buyer, or a dominant buyer, faces many sellers.
Read the full explanation
For it to operate, the buyer must have substantial market power, often because it is the sole employer or purchaser in a local or national market. Conditions include high barriers preventing other buyers from entering, immobility or limited alternative buyers for suppliers, and the buyer setting the price or wage rather than taking it. In labour markets, a monopsonist faces an upward-sloping labour supply curve, so hiring more workers raises the wage for all. The firm's marginal cost of labour exceeds the supply wage. Profit maximisation occurs where marginal cost of labour equals marginal revenue product, giving lower employment and lower wages than a competitive market. A classic example is a remote company town where one firm employs most residents and no other buyer of labour is nearby.
Your focus
- Define a monopsony as a single or dominant buyer in a market.
- Identify the conditions that allow a monopsony to operate, including barriers to entry and limited alternative buyers.
- Explain how a monopsonist in a labour market determines employment and wages using marginal cost of labour and marginal revenue product.
Monopsony exam tips
Marking Points
- A monopsony is a market with a single or dominant buyer facing many sellers.
- The buyer has market power to set the price or wage rather than accept a market-determined price.
- Barriers to entry prevent other buyers from entering and competing.
- Suppliers have limited alternative buyers, often due to immobility or geographic isolation.
- In a labour market, the monopsonist faces an upward-sloping supply of labour and a marginal cost of labour above the wage.
- The profit-maximising level of employment is where marginal cost of labour equals marginal revenue product, leading to lower wages and employment than under competition.
Examiner Tips
- 💡In multiple-choice questions, eliminate options that describe a single seller rather than a single buyer.
- 💡Look for the condition that the buyer sets the wage or price, not that the buyer takes a market wage.
- 💡Check whether the option correctly states that marginal cost of labour exceeds the wage for a monopsonist.
- 💡When a question gives a scenario, identify whether the buyer is the sole or dominant purchaser and whether suppliers have realistic alternatives.
Common Mistakes
- Confusing monopsony with monopoly: a monopoly is a single seller, while a monopsony is a single buyer. Correct by stating that monopsony power lies with the buyer.
- Assuming a monopsonist can pay any wage it likes without affecting supply: the supply curve is upward sloping, so expanding employment raises the marginal cost of labour. Correct by explaining that the wage must rise to attract more workers.
- Believing monopsony requires exactly one buyer nationally: a dominant buyer with substantial market power in a local or specialist market can also be a monopsonist. Correct by allowing for local monopsony.
- Ignoring barriers to entry for other buyers: without barriers, new buyers would enter and erode monopsony power. Correct by linking barriers to the persistence of monopsony.