5.4 Monopsonistic Markets
A monopsony is the sole buyer of labor: its marginal factor cost rises above labor supply, so it hires where MRP = MFC but pays the lower supply-curve wage.
A monopsony is a market with a single buyer — the classic example is the only major employer in a small town. To attract one more worker it must offer a higher wage, and that raise goes to everyone already hired. So the cost of an extra worker exceeds that worker's wage, and the MFC curve lies above the upward-sloping labor supply curve.
The monopsonist hires the quantity where MRP = MFC, then pays the wage on the labor supply curve directly below that quantity. The result: fewer workers hired and a lower wage than a competitive labor market would produce, with the wage below MRP.
Exam twist: a minimum wage set between the monopsony wage and the competitive wage can raise BOTH the wage and employment, because it flattens MFC up to the mandated wage — the opposite of the job-loss prediction for a competitive market.
Key terms for 5.4
Drag the curves yourself — the fastest way to make 5.4 stick.
Reading the monopsony wage at the MRP = MFC intersection. That intersection gives the quantity of labor hired; drop straight down to the labor SUPPLY curve to find the wage actually paid.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free — no spam.
No spam. Unsubscribe anytime.