A Monopsony is a single employer of labour in a market and obviously has the market buying power when they are actively looking for new employees, and can use that buying power to drive down wages. Good examples are the Indian Rail, Chinese Army and the NHS (the biggest employer in the world with 1.3million).
With the monopsony diagram, it is important to follow accurate analysis. The reason why MC are greater than AC is that the monopsonist MUST pay the same wage to all workers. E.g. in order to employ additional worker the firm must increase the real wage for that additional worker and also increase the real wage rate paid to all previously employed workers, thus the MC of employing additional Nth worker is always greater in monopsony.
The number of workers employed by a monopsonist is determined by MC = MRP (1); the quantity demanded is therefore Qm (2); in order to secure Qm quantity of workers the firm must pay a wage of Wm (3,4).
When compared to a Perfectly Competitive Labour Market (W ' L '), the Monopsonist pays lower real wage and employs less workers.
This is why we often see strong Trade Union presence (unionisation of the supply) in a Monopsony. The Trade Union is said to counter-balance the power of monopsony which will increase the real wage and employment as shown by the diagram below.
In this diagram, the real wage level (Wtu+m) and the quantity of labour emplyed (Qtu+m) is the outcome of the "fight" between Trade Unions and Monopsonist employer.
Further Reading :
Trade Union and Monopsonist Employers
Labour Market - Explaining Wage Differentials - PPT Show
Wage Determination in Competitive Markets
ECN5Explain how the wage rate is determined in a competitive labour market.
Explain how trade unions are able to influence wages.
Evaluate the view that trade unions raise wage rates but reduce levels of employment.
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