MARKET STRUCTURE AND FIRM BEHAVIOUR-1.pptx

MARKET STRUCTURE AND FIRM BEHAVIOUR

1. MARKET STRUCTURE AND FIRM BEHAVIOUR: MONOPSONY

2. DEFINITION Monopsony refers to a market structure in which there is only one buyer for a particular good or service. For example In tobacco production a buyer or company buys tobacco from multiple buyers hence the company becomes a monopsonistic market. Examples in Malawi include Limbe leaf

3. CHARACTERISTICS The buyer is dominant over the price No other buyer in the market Has impact on wages and labor markets

4. CAUSES MONOPSONY Government policies Barriers to entry Geographical isolation Network effects Mergers and acquisitions

5. ADVANTAGES Increases profits and returns to stakeholders Increases consumer surplus and economic welfare Market efficiency

6. DISADVANTAGES Reduced power for the supplier Potential market exploitation Increased wages and labor expenses

7. CONTROL OF MONOPSONY Minimum wages Price regulation Opening new firms for potential buyers Collective bargaining Consumer activism

8. MONOPSONY IN LABOR MARKETS A monopsonist will choose to use the quantity of labour where MEL(Marginal Expenditure on Labour) = MRPL(Marginal Revenue Product Labour) Wage is where it intersects labour supply If the firm uses QL2 of labour it would be in a situation where MEL is greater than MRPL The firm is spending more on a worker per value of the worker If the firm uses QL3 of labour it would be in a situation where MEL is less than MRPL The value of the worker exceeds the cost of the worker