Monopsony, explained.
Monopsony is buyer-side market power; in a simple labour model an employer recognises that hiring more can raise the wage it must pay.
Why it happens
Uniform wage supply is 10+L, marginal revenue product is 100−L and marginal labour cost is 10+2L. Profit is maximised at L=30 and wage 40, compared with competitive L=45 and wage 55.
Monopsony is buyer-side market power; in a simple labour model an employer recognises that hiring more can raise the wage it must pay.
Read the result
Marginal labour cost includes the wage effect on existing workers. Compare a complete profit calculation with the wage alone.
A worked example
Find the single employer’s hiring benchmark
Vary employment while reading wage 10+L and marginal revenue product 100−L.
Inspect profit near L thirty, where marginal revenue product equals marginal labour cost 10+2L.
Reveal the competitive benchmark L forty-five and distinguish its wage condition from the employer’s marginal-cost condition.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Uniform wage supply is 10+L, marginal revenue product is 100−L and marginal labour cost is 10+2L. Profit is maximised at L=30 and wage 40, compared with competitive L=45 and wage 55.
Where this idea is useful
A practical use
Distinguish the wage paid to a new worker from the extra total cost of expanding employment.
A common misconception
“Hiring cost for one additional worker is only that worker’s wage.”
With a uniform wage that rises with employment, expanding the workforce also raises pay for existing workers in this model.
What this explanation leaves out
- One uniform-wage employer, known curves and a static market are assumed. This is not evidence about an actual employer or a full minimum-wage policy model.
Does this prove a particular employer has monopsony power?
No. The single-buyer structure and curves are stipulated, and actual market power requires evidence beyond this illustrative calculation.
Which payments to existing workers change when employment expands?
Associated thinkers
Associations marked provisional are awaiting source review.
Further reading
Explore the original research or the teaching reference behind this experiment.