What is a Monopsony?

A monopsony occurs when a firm has total market power in employing factors of production, a pure monopsony is a single buyer of labour in the market. Think of it as monopoly for the labour market.

Effect of monopsony on wages and employment

A monopsonist is a wage maker. It is the occupations sole employer; it can choose any point on the supply curve.

If the monopsonist wishes to attract an extra worker it will have to pay a higher wage rate to all workers.

The monopsonist employer is expected to hire an extra worker as long as MRP > MCL so that the additional worker adds to profits.

The monopsonist hires E2 units of labour, but pays the lowest possible wage, W2.