User:MiloKing/Determination PQ Monopsonist SR
Note: this article is eventually intended to become a companion to Determination of price and quantity supplied by monopolistic firm in the short run.
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This article describes the process by which a monopsonist firm, i.e., a firm that is the only firm buying a particular commodity, selects the quantity to purchase and the price to set for the commodity.
Monopsonists are usually either firms who have a monopsony in the market for one of their inputs or non-firm buyers who have a monopsony in some consumption good they choose to buy. In the former case, there is a prominent subcase of labor monopsony, in which a firm is the only employer in a certain labor market. This is especially relevant when examining minimum wages applied to such firms. In this article, we consider several different types of monopsony buyers, including non-firm buyers and several different types of firms differing by firm structure.
Some monopsonists are not firms who possess a monopsony in one of their input markets. Some are just individual buyers purchasing consumption goods. As with the other cases, we are trying to determine the price the buyer pays and the quantity they purchase. In this case, the relevant factors are the buyer's willingness to pay for an additional unit and the cost to the buyer of buying an additional unit (called the marginal revenue cost here). The latter factor is derived from the supply curve.
One important observation is that the marginal revenue cost of a given unit exceeds the actual price of that unit, assuming the law of supply holds and that there is no price discrimination. The reason why is that, when the buyer decides to buy an additional unit, not only do they have to pay the price for that unit, but they also have to pay that new, higher price on all the other units they are buying.
So if, for example, the supply schedule for a good is $1 for one unit, $2 for two units, $3 for 3 units, et cetera, the marginal revenue cost of buying a third unit is actually $5, not just $3. Instead of spending $4 to buy two units, the monopsonist would be spending $9 to buy three units.
Determining the quantity purchased by the monopsonist
The monopsonist chooses the total number of units to buy that maximizes the difference between the total willingness to pay and the total cost of buying the units. The monopsonist's relevant consideration for buying an additional unit is how much the buyer is willing to pay for the additional unit versus the marginal revenue cost. We assume here that the buyer's willingness to pay for an additional unit falls as they purchase more units. We already assumed that the law of supply holds, and so that the marginal revenue cost for an additional unit rises as the number of units purchased rises.
Therefore, the monopsonist will either buy zero units (if it is not willing to pay the marginal revenue cost for the first unit), or it will buy units until the marginal revenue cost exceeds its marginal willingness to pay.
Determining the price paid by the monopsonist
The monopsonist has absolute market power, and will pay the lowest price it can for the last unit it wishes to purchase. Therefore, the monopsonist will set the price it pays at whatever the minimum amount is that the sellers would accept for the last unit the monopsonist buys.