More from Jean Maria George

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, , Monopsony refers to the form of market organization where there is a single, buyer of a particular input., , , , An example of monopsony is given by the "mining towns" of yester year in the, United States, where the mining company was the sole employer of labour in, town., , , , Monopsony arises when an input is specialized and is thus much more, productive to a particular firm than to any other firm or use. Be cause of the, , greater input productivity, this firm can pay a higher price for the input and so, become a monopsonist. Monopsony also results from lack of geographical and, occupational mobility of inputs.

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Equilibrium of a monopsonist, who uses a single variable factor., , , In this case the demand for labour by the individual firm is the, marginal revenue product curve (𝑀𝑅𝑃𝐿 ), defined by multiplying the, 𝑀𝑃𝑃𝐿 times the marginal revenue of selling the commodity produced, , , , 𝑀𝑅𝑃𝐿 , = 𝑀𝑃𝑃𝐿 × 𝑀𝑅𝑋, , , , The 𝑀𝑅𝑃𝐿 curve has a negative slope because 𝑀𝑃𝑃𝐿 , 𝑃𝑋 and 𝑀𝑅𝑋, decline as output expands and the price of the product falls.

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, , The supply of labour to the individual firm, however, is not perfectly elastic,, because the firm is large., , , , For simplicity we assume that the firm is a monopsonist (i.e., the only buyer) in, the labour market., , , , In this case the supply of labour has a positive slope as the monopsonist, , expands the use of labour he must pay a higher wage., , , The supply of labour shows the average expenditure or price that the, monopsonist must pay at different levels of employment., , , , Multiplying this price of the input by the level of employment we find the total, expenditure of the monopsonist for the input.

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, , However, the relevant magnitude for the equilibrium of the monopsonist is, the marginal expenditure of purchasing an additional unit of the variable, factor., , , , The marginal expense is the change in the total expenditure (on the, factor) arising from hiring an additional unit of the factor., , , , Hiring an additional unit of input increases the total expenditure on the, factor by more than the price of this unit because all previous units, , employed are paid the new higher price., , , Thus the marginal expense curve lies above the supply curve (or average, expense curve).

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, , The firm is in equilibrium when it equates the marginal, expenditure on the factor to its MRP. This is shown by point ‘e’ in, , figure 5.17.

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, , At ‘e’ the marginal expense (which is the marginal cost) of labour is, equal to the marginal revenue product of labour., , , , To the left of ‘e’ an additional unit of labour adds more to the revenue, than to the cost of the input; hence it pays the firm to hire additional, units of labour., , , , To the right of ‘e’ an additional unit of the factor costs more than the, revenue it brings to the firm; hence the profit is decreased., , , , It follows that profit is maximized by employing that quantity of labour, (𝐼𝑒 ) for which the ME is equal to the marginal revenue of the input.

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, , The wage rate that the firm will pay for the 𝐼𝑒 units of labour is 𝑤𝑓, defined by the point on the supply curve corresponding to the, equilibrium point ‘e’., , , , When the firm has monopsonist power in the input market, it pays to, the factor a price which is less than its MRP., , , , This gives rise to monopsonistic exploitation, which is something in, addition to monopolistic exploitation.

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, , Monopolistic exploitation arises from the fact that the demand, for the commodity is negatively sloped so that 𝑀𝑅𝑋 < 𝑃𝑋 ., , , , The factor owners in this case are paid a price equal to the, MRP of the factor, which is less than the factor's VMP., , , , Monopsonistic exploitation arises from the monopsonistic power, , of firms, and is something in addition to the monopolistic, exploitation.

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, , If the factor markets are monopsonistic, changes in the amount of factors, employed causes changes in the prices of factors. Thus w and r are not, given., , , , The monopsonist must look at the marginal expense of the factors., , , , A monopsonist who uses several variable factors will use the input, combination at which the ratio of the MPP to the ME is equal for all, variable inputs., , , , The least-cost combination is obtained when the marginal rate of, technical substitution (𝑀𝑅𝑇𝑆𝐿,𝐾 ) equals the marginal expense of input, ratio.