Monopsonistic
Markets

Explore markets where a single buyer wields pricing power over suppliers, shaping wages, employment, and allocative efficiency.

AP Microeconomics

What Is a Monopsony?

A monopsony is a market structure in which there is only one buyer (or a dominant buyer) for a good, service, or factor of production. While a monopoly controls the selling side, a monopsony controls the buying side.

Mono

Greek for "single"

Opsonia

Greek for "purchase"

Result

One buyer, many sellers

Real-World Examples

Monopsonies often appear in labor markets where a single employer dominates a region or industry. The buyers of labor have outsized power to set wages.

Company Towns

A single factory or mine is the only employer in a remote area, giving it wage-setting power.

Government

The federal government is often the sole buyer of military equipment, space vehicles, or certain professional services.

Sports Leagues

Professional leagues with draft rules and salary caps act as monopsony buyers of athlete labor.

Why It Matters

A monopsonist faces an upward-sloping supply curve. To hire one more unit (e.g., one more worker), it must raise the wage for all workers, not just the marginal one. This makes the marginal factor cost ($ MFC $) exceed the supply price.

The Core Rule: $ MFC > S $

If the supply curve is $ W = a + bQ $, then total factor cost is $ TFC = W \cdot Q = aQ + bQ^2 $. Taking the derivative:

Reading the Monopsony Graph

1

Find $ Q_m $: Where the MFC curve intersects the MRP (demand) curve. This is the profit-maximizing quantity.

2

Find $ W_m $: Drop straight down from that intersection to the Supply curve. The wage is read off the supply curve, not the MFC curve.

3

Compare to competition: The competitive outcome is where S = MRP. The monopsonist hires less and pays less.

4

Deadweight loss: The triangle between $ Q_m $ and $ Q_c $, bounded by MRP above and S below.

Monopsony vs. Monopoly

	Monopsony	Monopoly
Market Power	Single buyer	Single seller
Relevant Curve	$ MFC > \text{Supply} $	$ MR < \text{Demand} $
Price Effect	Price pushed below competitive level	Price pushed above competitive level
Quantity Effect	Less purchased than competitive	Less sold than competitive
Deadweight Loss	Yes: triangle between $ Q_m $ and $ Q_c $	Yes: triangle between $ Q_m $ and $ Q_c $
Mirror Curve	MFC mirrors MR	MR mirrors MFC

Profit-Maximizing Rule

A monopsonist maximizes profit (or minimizes cost per unit of output) by hiring until the marginal revenue product equals the marginal factor cost:

Because $ MFC > S $ everywhere, the monopsonist always pays workers less than their marginal revenue product: $ W_m < MRP(Q_m) $. The gap $ MRP - W_m $ represents monopsonistic exploitation.

How to Solve Monopsony Problems

1

Identify the supply curve: $ W = a + bQ $. This is the price the monopsonist must pay per unit.

2

Derive MFC: $ TFC = WQ = aQ + bQ^2 $, so $ MFC = a + 2bQ $. Double the slope of supply.

3

Identify the MRP curve: $ MRP = c - dQ $ (the firm's demand for the factor).

4

Set MFC = MRP: Solve $ a + 2bQ = c - dQ $ for $ Q_m $.

5

Find $ W_m $: Plug $ Q_m $ back into the supply equation, not MFC.

Worked Example: Basic

Suppose a monopsonist faces: $ S: W = 2 + 3Q $ and $ MRP = 20 - Q $. Find $ Q_m $, $ W_m $, and the competitive outcome.

1

MFC: $ MFC = 2 + 6Q $ (double the slope of supply).

2

Set MFC = MRP: $ 2 + 6Q = 20 - Q \implies 7Q = 18 \implies Q_m = \frac{18}{7} \approx 2.57 $.

3

Wage: $ W_m = 2 + 3(2.57) = \$9.71 $. The monopsonist pays \$9.71.

4

Competitive: $ S = MRP: 2 + 3Q = 20 - Q \implies 4Q = 18 \implies Q_c = 4.5 $, $ W_c = \$15.50 $.

Worked Example: With a Table

A firm is the only employer in town. Use the table to find the monopsony hiring level. $ MRP = \$30 $ per worker (constant).

Workers	Wage	TFC	MFC
1	\$10	\$10	\$10
2	\$15	\$30	\$20
3	\$20	\$60	\$30
4	\$25	\$100	\$40
5	\$30	\$150	\$50

Worked Example: Deadweight Loss

Using Example 1: $ Q_m \approx 2.57 $, $ Q_c = 4.5 $. Calculate the deadweight loss triangle.

Minimum Wage in a Monopsony

Unlike in competitive markets, a minimum wage set between $ W_m $ and $ W_c $ can actually increase both employment and wages in a monopsony. This is a key AP distinction.

Common Mistakes

Reading Wage off MFC

The wage is on the supply curve at $ Q_m $, not where MFC = MRP. The MFC intersection gives only the quantity.

Confusing with Monopoly

Monopoly sets price above competitive; monopsony sets price below. The curves are mirrors, not identical.

Minimum Wage Always Bad

In a monopsony, a carefully set minimum wage can increase employment. This contradicts the competitive model intuition.

Summary: Key Relationships

Concept	Competitive	Monopsony
Hiring Rule	$ W = MRP $	$ MFC = MRP $
Wage Determination	Market equilibrium	Read from Supply at $ Q_m $
Quantity Hired	$ Q_c $ (higher)	$ Q_m $ (lower)
Wage Level	$ W_c $ (higher)	$ W_m $ (lower)
MFC vs. Supply	$ MFC = S = W $	$ MFC > S $
Deadweight Loss	None	Triangle between $ Q_m $ and $ Q_c $
Min. Wage Effect	Reduces employment	Can increase employment

Question 1 of 5

In a monopsonistic labor market, the firm determines the wage by looking at which curve at the profit-maximizing quantity?

The monopsonist finds $ Q_m $ where $ MFC = MRP $, but reads the wage off the supply curve at that quantity. The supply curve tells the firm the minimum wage workers will accept.

Question 2 of 5

If the labor supply curve is $ W = 4 + 2Q $, what is the marginal factor cost (MFC) curve?

Since $ TFC = WQ = 4Q + 2Q^2 $, taking the derivative gives $ MFC = 4 + 4Q $. The MFC shares the same intercept as supply but has double the slope.

Question 3 of 5

Compared to a competitive labor market, a monopsonist will:

A monopsonist restricts hiring to where $ MFC = MRP $, which is a lower quantity than competition. It then pays the lower wage from the supply curve, not the higher MFC.

Question 4 of 5

A minimum wage set between $ W_m $ and $ W_c $ in a monopsonistic market will most likely:

In a monopsony, a binding minimum wage between $ W_m $ and $ W_c $ flattens the MFC curve, making it horizontal at $ W_{min} $. This expands hiring because the firm no longer faces rising MFC for each additional worker.

Question 5 of 5

A monopsonist faces $ S: W = 10 + 2Q $ and $ MRP = 50 - 4Q $. What is the monopsony wage $ W_m $?

$ MFC = 10 + 4Q $. Set $ MFC = MRP $: $ 10 + 4Q = 50 - 4Q \implies 8Q = 40 \implies Q_m = 5 $. Then read the wage from the supply curve: $ W_m = 10 + 2(5) = \$20 $.

Concept	Competitive	Monopsony
Hiring Rule	\( W = MRP \)	\( MFC = MRP \)
Wage Determination	Market equilibrium	Read from Supply at \( Q_m \)
Quantity Hired	\( Q_c \) (higher)	\( Q_m \) (lower)
Wage Level	\( W_c \) (higher)	\( W_m \) (lower)
MFC vs. Supply	\( MFC = S = W \)	\( MFC > S \)
Deadweight Loss	None	Triangle between \( Q_m \) and \( Q_c \)
Min. Wage Effect	Reduces employment	Can increase employment

MonopsonisticMarkets

What Is a Monopsony?

Real-World Examples

Why It Matters

The Core Rule: \( MFC > S \)

Reading the Monopsony Graph

Monopsony vs. Monopoly

Profit-Maximizing Rule

How to Solve Monopsony Problems

Worked Example: Basic

Worked Example: With a Table

Worked Example: Deadweight Loss

Minimum Wage in a Monopsony

Common Mistakes

Summary: Key Relationships

Question 1 of 5

Question 2 of 5

Question 3 of 5

Question 4 of 5

Question 5 of 5

Monopsonistic
Markets