Monopsony

Monopsony
source of data : micro economics by ML Jingan

1. MONOPSONY Muhammed Suhaib m Head of the department, department of economics, Kr’s sree Narayana college, thozhuvanoor

2. MONOPSONY Monopsony refers to a market situation when there is a single buyer of a commodity or service. It applies to any situation in which there is a ‘monopoly’ element in buying. For example, when consumers of a certain commodity are organised or when a certain individual happens to have a taste for some commodity which no one else requires, or when a single big factory in an isolated locality is the sole buyer of some grades of labour, there is monopsony.

3. MONOPSONY Liebhafsky defines monopoly as “the case of a single buyer who is not in competition with any other buyers for the output which he seeks to purchase, and as a situation in which entry into the market by other buyers is impossible”. Just as a monopolist is able to influence the price of the product by the amount he offers for sale, similarly the monopsonist is able to influence the supply price of his purchases by the amount he buys.

4. MONOPSONY The analysis of monopsony pricing is similar to that under monopoly pricing. the monopolist aims at the maximisation of his profits, while the monopsonist aims at the maximisation of his surplus. The monopolist equates his marginal cost with his marginal revenue to maximise his profits The monopsonist regulates his purchases in such a way that marginal cost equals marginal utility whereby his consumer’s surplus is the maximum.

5. Price and Output Determination The determination of price under monopsony is explained by this figure. The supply curve of the industry is the average cost of the monopsonist. It is from the industry that he buys the product. This is represented by the curve AC/S in the figure.

6. Price and Output Determination MC is its corresponding marginal cost curve. MU is the marginal utility curve of the monopsonist. The monopsonist equilibrium is established at E where the marginal utility of the product to the monopsonist equals the marginal cost. He buys OM quantity at OA (=MB) price which is the supply price for that output. The surplus obtained by the monopsonist is the area DEBA-the difference between what he is Prepared to pay ODEM and what he actually pays OABM (DEBA =ODEM-OABM).