AP® Microeconomics · Unit 5 · Topic 5.4
The Monopsony Wage, Quantity, and a Minimum Wage
A monopsonist is the only buyer of labor, so it faces the whole upward-sloping supply curve. It hires where MRP equals MRC, then pays the lower wage that curve shows for that quantity, hiring fewer workers at lower pay than a competitive market would.
In a competitive labor market, one firm hiring a few more workers doesn't move the wage, so marginal resource cost equals the wage. A monopsonist is the only employer around, so to hire one more worker it has to raise the wage for everyone already on payroll, not just the new hire. That makes marginal resource cost rise faster than the wage itself, and MRC sits above the supply curve.
To find the hiring level, set MRP equal to MRC and solve for L, the quantity of labor. That quantity is lower than the competitive outcome, where MRP would equal the wage directly. Once you have that quantity, go back to the supply curve, not the MRC curve, to find the wage the firm actually pays, since supply tells you the lowest wage that gets that many workers to show up. With MRP running 30, 26, 22, 18 and MRC running 12, 16, 20, 24 as L goes 1, 2, 3, 4, MRP exceeds MRC through L=3 (22 vs 20) and MRC overtakes MRP at L=4 (24 vs 18), so the monopsonist hires 3 workers.
This connects to the competitive factor market right before it: same MRP-equals-cost logic, but monopsony drives a wedge between what workers are worth and what they're paid. That wedge is why a minimum wage set between the monopsony wage and the competitive wage can raise employment instead of cutting it, flipping the usual minimum-wage story from product markets.
Key terms
- Monopsony
- A market with only one buyer, here one employer facing the entire labor supply curve.
- Marginal resource cost (MRC)
- The added cost of hiring one more worker, including the higher wage paid to all current workers.
- Marginal revenue product (MRP)
- The extra revenue a firm earns from hiring one additional worker.
- Labor supply curve
- The upward-sloping relationship showing the wage needed to attract each quantity of workers.
Watch it explained
- How it worksHow do you get the monopsony quantity from MRP equals MRC and the wage from the supply curve?
- Worked exampleFind the monopsony hiring level when MRP runs 30, 26, 22, 18 and MRC runs 12, 16, 20, 24.
- Going furtherWhat happens to employment when a minimum wage is set above the monopsony wage?
- Common mistakeWhy doesn't a minimum wage cut employment here the way it does in a competitive market?
Check yourself
End of topic.