Monopsony in the Labor Market

supply of labor

w(L) = a + b

c

L

a

1

b

0.5

c

linear

quadratic

marginal revenue product

R'(L) = α β

β-1

L

α

15

β

0.5

monopsony wages

competitive wages

This Demonstration graphically represents the simple model of monopsony, an imperfect market structure characterized by the market power of one buyer. Market power means the ability to influence the price in the market. The monopsonist unilaterally sets the price (or wage if it comes to the labor market with one employer) according to the standard condition of equivalence between marginal benefits and marginal costs. We consider the labor market where the wage for a unit of labor

w

reflects the costs of the firm that can extract benefits (revenue) from employing labor

L

.