monopsony

Question 1

what is a monopsony?

Answer 1

• a single buyer of a good or service/ sole employer of labour
  pure monopsony- a firm that is the sole buyer of resources or supplies
  many firms have some degree of monopsony power where they have some control over their suppliers

Question 2

what are the characteristics of a monopsony?

Answer 2

• monopsony has negotiating power
  
  • can negotiate with a supplier to lower prices
  • reduced cost of purchasing inputs → increases their profit margin
• monopsony is a wage maker

Question 3

draw a diagram for a monopsony

Answer 3

Question 4

how do firms maximise revenue from workers?

Answer 4

• maximise revenue from workers by hiring up to where MRP= MC of labour
  
  • marginal revenue product

Question 5

what does supply equal to for a monopsony and why?

Answer 5

• for a monopsony supply=AC of labour
• if they want to employ more workers they have to increase wages for every worker, not just the new worker
  
  • this means that the marginal cost of labour is greater than the average cost of labour

Question 6

where are wages and quantities determined in a competitive labour market?

Answer 6

where demand equals supply in a competitive labour market, this is where wages and quantities are determined
- monopsonist reduced employment compared to competitive market outcome and gives lower wages as well
- also workers are being paid a wage which is lower than their MRP

Question 7

what does it mean when the wages are lower compared to MRP?

Answer 7

the lower the wages are compared to MRP, the greater the monopsony power that exists in that market

Question 8

why is the supply of labour for a monopsonist equal to the average cost of labour?

Answer 8

• supply of labour tells us the number of workers that will work at different wage rates
  
  • w= a + bQ
• AC of labour= TC of labour/ Q
  
  • TC of labour = wage

Question 9

how do you calculate the AC of labour ?

Answer 9

AC of labour= TC of labour/ Q

Question 10

what does TC of labour equal to?

Answer 10

TC of labour = wage

Question 11

what is the benefit of monopsony power to firms?

Answer 11

• achieve purchasing economies of scale→ lead to lower average cost
• lower purchase costs= higher profits + increased returns to shareholders
• extra profit can be reinvested into capital, research development etc

Question 12

what is the benefit of monopsony power to consumers?

Answer 12

• lower prices
• improved value for money

Question 13

what are the costs of monopsonys?

Answer 13

• businesses may use buying power to squeeze lower prices out of suppliers→ reduced profit for firms in supply chains
  
  • may cause lower incomes
• less choice for consumers
• higher prices for consumers in the long run if some suppliers leave the market

Question 14

what are some general benefits of monopsonys

Answer 14

power in buying means the firm can make more profits as suppliers cant overcharge
lower buying costs -> lower prices for consumers
higher profits can be used to reinvest and innovate
monopsony power can give power to buyers in the face of monopoly supply of resources
workers could be paid higher wages

Question 15

what are some general drawbacks of monopsonys

Answer 15

suppliers can be squeezed out of business
choice for consumers could be limited as monopsony acts as a barrier to entry for new firms
higher profits of monopsony can result in inequality
CMA may investigate monopsonys