Monopsony

Assumptions and conditions

• A single buyer (or one dominant buyer) of a good, service or factor of production.
• Many sellers who have few alternative buyers: farmers selling to one processor, nurses to a national health service, workers in a one-employer town.
• Conditions that create monopsony power: few alternative buyers or employers, sellers or workers who are immobile, and a buyer that buys a large share of the market. Large supermarkets have monopsony power over suppliers.

Monopsony in a labour market

To hire more workers the monopsonist must raise the wage, and pay that higher wage to all workers. So the marginal cost of labour (MCL) lies above the supply curve (average cost of labour, ACL = W).

The firm hires where MCL = MRP (marginal revenue product, the demand for labour) and pays the wage on the supply curve at that employment.

Diagram in words: upward-sloping supply (ACL), a steeper MCL above it, downward-sloping MRP. Employment where MCL crosses MRP; drop down to the supply curve for the wage. Compared with a competitive market (where supply meets MRP), both wages and employment are lower.

Costs and benefits

Costs: lower prices for suppliers (may drive small farmers or firms out); lower wages and employment for workers; possible fall in supplier quality and investment.

Benefits: lower costs for the monopsonist, which may be passed on to consumers as lower prices; a public sector monopsony (such as a national health service buying medicines) can use its buying power to get value for taxpayers' money.

Worked example

A monopsony employer faces labour supply W = 5 + 0.5L, so MCL = 5 + L. MRP = 20 - 0.5L. Find employment and wage, and compare with a competitive market.

1. MCL = MRP: 5 + L = 20 - 0.5L, so 1.5L = 15, L = 10.
2. Wage from supply: W = 5 + 0.5 x 10 = $10.
3. Competitive: supply = MRP: 5 + 0.5L = 20 - 0.5L, L = 15, W = $12.5.

Answer: Monopsony: 10 workers at $10; competitive: 15 workers at $12.5.

Check yourself

1. A monopsony faces labour supply W = 4 + L (so MCL = 4 + 2L) and MRP = 40 - L. Find the number employed.
   Show answer

   12 workers. 4 + 2L = 40 - L, so 3L = 36 and L = 12.

2. For the same monopsony, find the wage paid.
   Show answer

   $16. W = 4 + 12 = $16, read from the supply curve.

3. For the same market, find the competitive wage, where supply equals MRP.
   Show answer

   $22. 4 + L = 40 - L gives L = 18, so W = 4 + 18 = $22.

4. A monopsony is a market with
   • a single dominant seller
   • many buyers and sellers
   • two dominant sellers
   • a single dominant buyer
   Show answer

   a single dominant buyer. 'Mono' one, 'opsony' buying.

5. Why is the marginal cost of labour above the supply curve for a monopsonist?
   • Workers are less productive
   • To hire an extra worker it must raise the wage for all its workers
   • The government taxes wages
   • Demand for the product is elastic
   Show answer

   To hire an extra worker it must raise the wage for all its workers. The extra cost includes the higher wage paid to existing workers.

6. Which is most likely to have monopsony power?
   • A small corner shop
   • A firm in perfect competition
   • One of thousands of wheat farmers
   • A large supermarket buying milk from many small farmers
   Show answer

   A large supermarket buying milk from many small farmers. A dominant buyer with many small suppliers.

7. Which is a possible benefit of monopsony power?
   • Higher wages for workers
   • Lower costs passed on to consumers as lower prices
   • Higher prices for suppliers
   • More employment than in a competitive market
   Show answer

   Lower costs passed on to consumers as lower prices. Lower input costs can mean lower prices, if passed on.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (XEC11/YEC11), Unit 3 Business behaviour and Appendices 6 and 7
• Pearson Edexcel IAL Economics WEC13/01 mark scheme, January 2021

Last updated 8 November 2026. Spotted a mistake? Tell us.