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 17 of 20
…
We have assumed the labor market is competitive.
There are many buyers (firms) and sellers (workers) 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 chooses point a, where it employs small number of workers L and pays lower wage W,
Without the monopsony situation the firm would choose point b, employing a larger number of workers L1 and paying higher wage W1.
…
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.
In sum, monopsony results in the firm:
-hiring fewer workers
-paying lower wages
-producing a smaller amount of product
-increasing profits
-creating deadweight loss.
…
Here the formal, detailed model of monopsony is not discussed because monopsonies are rare.
For labor markets the basic 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.
…
monopsony
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