A monopsony occurs when a firm has market power in employing workers. A pure monopsony means there is only one employer of labour.
Diagram of Monopsony
- The competitive wage is at W1, where S = D.
- However, a monopsony finds that the MC of labour increases at a faster rate than AC of labour.
- The monopsony maximises profits where MR = MC. therefore can pay a wage of W2.
A minimum wage of W3 will keep employment at Q2. A minimum wage of W1 keeps employment at Q1.