Monopsony

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Monopsony is one of three extreme types of market structure (the other two types are perfect competition and monopoly).

The easiest way do describe it, is to present it as a mirror image of the monopoly. On the market having the structure of monopoly there is only one producer and multiple customers. In the case of monopsony situation is reversed and there is only one recipient of goods or services, and many producers supplying the products.

Monopsony and the prices of factors of production

Monopsony influence prices of factors of production. Because customers has to do with increasing supply curve for a given production factor, it must offer a higher price (to monopsony), to get a necessary amount of this factor.

The marginal cost of an additional unit of a factor of production therefore exceeds its price. Increasing the use of amount of the particular factor of production, raises the price to be paid for it to all buyers of this factor.

Monopson and demand for labor

The company which is monopsony in the labor market is forced to employ additional workers which involve offering them higher wages, also with the increase in wages also for already employed. This is caused by the fact that all employees must receive one rate and to attract further workers to the company.

Monopsony company always tends to equate marginal revenue generated from the additional employee and the marginal cost of employing him.

Monopsony is potentially a single buyer of the good derived from particular branch of the industry.

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