![]() Monopsony is the buyer’s counterpart of monopoly. A market in which there is only one buyer of a good, service, or factor of production is called a monopsony. An example might be an isolated mining town where the mine is the single employer. Here, the firm can obtain Q 1 units at a price P 1, but it must pay a higher price per unit, P 2, to obtain Q 2 units.Ĭonsider a situation in which one firm is the only buyer of a particular factor. The price-setting firm sets the price consistent with the quantity of the factor it wants to obtain. A price-setting firm faces an upward-sloping supply curve S in Panel (b). To obtain a larger quantity, such as Q 2, it must offer a higher price, P 2.įigure 14.1 Factor Market Price Takers and Price SettersĪ price-taking firm faces the market-determined price P for the factor in Panel (a) and can purchase any quantity it wants at that price. It obtains Q 1 units of the factor when it sets the price P 1. A price-setting firm faces an upward-sloping supply curve such as S in Panel (b). A price-taking firm can hire any amount of the factor at the market price it faces a horizontal supply curve for the factor at the market-determined price, as shown in Panel (a) of Figure 14.1 “Factor Market Price Takers and Price Setters”. This creates a fundamental difference between price-taking and price-setting firms in factor markets. ![]() ![]() ![]() Depending on the factor supply curve, firms may also have some power to set prices they pay in factor markets.Ī firm can set price in a factor market if, instead of a market-determined price, it faces an upward-sloping supply curve for the factor. We have seen that market power in product markets exists when firms have the ability to set the prices they charge, within the limits of the demand curve for their products. ![]() Discuss situations of monopsony in the real world.Apply the marginal decision rule to the profit-maximizing solution of a monopsony buyer.Define monopsony and differentiate it from monopoly. ![]()
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