Lesson preview · Wage Determination
Monopsony
~8 min · Free to read
Pine Hollow is a small Appalachian town with one major employer — Carter Mining Company. Almost every working-age adult in town either works at the mine or has a relative who does. If Carter wants to hire more miners, it has to raise the wage to attract people from their next-best alternative (commuting an hour, retraining, leaving town). And the kicker: when Carter raises the wage, it has to pay the new wage to ALL its miners, not just the new ones.
That last fact does most of the work in this lesson. It’s why monopsony (one buyer of labor, in contrast to monopoly’s one seller) produces strange-looking results — fewer workers hired than in a competitive market, lower wages, and a chunk of value that flows to the firm instead of to workers.
Walk through the arithmetic to see why. Suppose Pine Hollow’s labor supply is — the 1st miner needs 12 dollars/hour to show up, the 2nd needs 14, the 3rd 16, and so on. Carter currently employs 5 miners at 20 dollars/hour for a total wage bill of 100 dollars/hour. Now Carter considers hiring a 6th miner. The supply curve says she requires 22 dollars/hour.
But Carter can’t pay her 22 and keep the existing 5 at 20 — they’d quit, demand parity, walk out. So the 6th miner forces Carter to pay 22 to all six. New total wage bill = 6 × 22 = 132 dollars/hour. The marginal cost of the 6th miner isn’t her 22 dollar wage — it’s dollars. The extra 10 dollars is the raise Carter is forced to give the 5 original miners. That’s where the marginal factor cost (MFC) of labor exceeds the wage.
Key Term
Marginal factor cost (MFC)
The cost to the firm of hiring one more worker. For a competitive firm facing a flat supply curve, — no raise required. For a monopsonist facing an upward-sloping supply curve, hiring the next worker also raises the wage paid to every existing worker, so:
The curve sits ABOVE the supply curve — just as a monopolist’s sits below its demand. With linear supply, has the same intercept as but twice the slope.
The monopsonist hires until the marginal factor cost equals the marginal revenue product — then pays the supply-curve wage at that quantity, NOT the MRP.
Two takeaways the widget makes visible. One: MFC isn’t a mysterious extra curve — it’s just the marginal arithmetic in the Total-bill column of the table. The graph’s MFC line is a plot of those numbers. Two: the monopsonist hires where MFC = MRP (L = 6), but pays only the supply-curve wage at that L (22 dollars). The gap between the 34 dollar MRP and the 22 dollar wage — 12 dollars per worker — is the surplus the firm extracts from each miner. In a competitive market, that money would flow to workers as higher wages.
Worked Example
A monopsony faces labor supply and . Find optimal employment and the wage paid. Compare to the competitive outcome.
Check yourself · no marks
Why does exceed the wage for a monopsonist?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
A monopsony is a market with:
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