Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 6 The Economics of Labor Markets
Chapter 18 of 36 The Markets for the Factors of Production
Section 15 of 22
…
Figure B here
…
We have assumed the labor market is competitive.
There are many buyers and sellers of labor.
Each buyer or seller has negligible effect on the wage level.
Imagine the labor market in a small town dominated by a single large employer.
This employer could exert a strong influence on the going wage, using its market power to drive down the wage.
A market like this where there is a single buyer is called a monopsony.
A monopsony is in many ways similar to a monopoly, which is a market with one seller.
…
Previously we saw a monopoly firm produces less of the good than would a competitive firm.
By reducing the quantity offered for sale the monopoly firm can raise its product price and the firm’s profits.
Similarly, a monopsony firm in a labor market hires fewer workers than would a competitive firm by reducing the number of jobs available.
Per Figure B
The monopsony firm moves down and left along the labor supply curve S.
It employs small number of workers L, rather than free market amount L1.
Then it pays lower wage W, rather than free market higher wage W1, increasing its profits and creating deadweight loss.
…
Both monopolists and monopsonists reduce economic activity in a market
below the socially optimal level.
In both monopoly and monopsony cases the existence of market power distorts the outcome and causes deadweight losses.
Here the formal model of monopsony is not discussed in detail because monopsonies are rare.
For labor markets the model of supply and demand is the best.
Workers almost always have many possible employers.
Firms compete with one another to attract workers, driving wages up to free market value.

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