Market Failure in Labour Markets Flashcards
1
Q
What is monopsony?
A
This occurs when there is just one buyer of labour in a market, or if the firm has substantial market power in employing workers.
MONOPSONY DIAGRAM
- The marginal cost of employing one more worker will be higher than the average cost. This is because, to employ one extra worker, the firm has to increase the wages of all workers.
- Therefore, MC is steeper than AC.
- To maximise the level of profit, the firm employs Q2 of workers where MC = D (MRP).
- Therefore, in a monopsony, the firm only has to pay a wage of W2. This is less than the competitive wage of W1.
- The monopsony also employs fewer workers than a competitive market.
- Lack of information, and difficulties in switching jobs, gives many firms a degree of monopsony power.
