The marginal factor cost ( MFC) exceeds the price of the factor. It includes the $8 the firm pays for the fourth unit plus an additional $2 for each of the three units the firm was already using, since it has increased the prices for the factor to $8 from $6. The marginal factor cost of the fourth unit of the factor is thus $14. That would increase the firm’s total factor cost from $18 to $32. Given the supply curve, the only way the firm can obtain four units of the factor rather than three is to offer a higher price of $8 for all four units of the factor. Suppose the firm is considering adding one more unit of the factor. Suppose the monopsony firm is now using three units of the factor at a price of $6 per unit. Notice that the marginal factor cost curve lies above the supply curve. The table gives prices and quantities for the factor supply curve plotted in the graph. Such a case is illustrated in Figure 14.2 “Supply and Marginal Factor Cost”, where the price and quantity combinations on the supply curve for the factor are given in the table.įigure 14.2 Supply and Marginal Factor Cost That means that the monopsony firm faces the upward-sloping market supply curve for the factor. But a single firm constitutes the entire market for the factor. Monopoly means a single seller monopsony means a single buyer.Īssume that the suppliers of a factor in a monopsony market are price takers there is perfect competition in factor supply. Monopsony is the buyer’s counterpart of monopoly. A market in which there is only one buyer of a good, service, or factor of production is called a monopsony. An example might be an isolated mining town where the mine is the single employer. Here, the firm can obtain Q 1 units at a price P 1, but it must pay a higher price per unit, P 2, to obtain Q 2 units.Ĭonsider a situation in which one firm is the only buyer of a particular factor. The price-setting firm sets the price consistent with the quantity of the factor it wants to obtain. A price-setting firm faces an upward-sloping supply curve S in Panel (b). To obtain a larger quantity, such as Q 2, it must offer a higher price, P 2.įigure 14.1 Factor Market Price Takers and Price SettersĪ price-taking firm faces the market-determined price P for the factor in Panel (a) and can purchase any quantity it wants at that price. It obtains Q 1 units of the factor when it sets the price P 1. A price-setting firm faces an upward-sloping supply curve such as S in Panel (b). A price-taking firm can hire any amount of the factor at the market price it faces a horizontal supply curve for the factor at the market-determined price, as shown in Panel (a) of Figure 14.1 “Factor Market Price Takers and Price Setters”. This creates a fundamental difference between price-taking and price-setting firms in factor markets. Depending on the factor supply curve, firms may also have some power to set prices they pay in factor markets.Ī firm can set price in a factor market if, instead of a market-determined price, it faces an upward-sloping supply curve for the factor. We have seen that market power in product markets exists when firms have the ability to set the prices they charge, within the limits of the demand curve for their products. Discuss situations of monopsony in the real world.Apply the marginal decision rule to the profit-maximizing solution of a monopsony buyer.Define monopsony and differentiate it from monopoly.
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