Tuesday, June 12, 2007

Monopsony and Minimum Wage

Readers Question: can you draw me the diagram for the nmw and monospony power. I'm confused with Nmw is below the competitive level but above monopsony where how do i find the quantity demanded is it when D=AC or when the wage rate and demand curve meet?

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.

1 comment:

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