programs at universities, the restricted supply of labour drives wages in
these occupations higher than they would otherwise be.
A Monopsony Firm in the Labour Market
A monopsony is a market in which there is only one buyer; monopsony
is to the buying side of the market what monopoly is to the selling side.
Examples are rarer today, but historically in both Canada and the United
States many small towns were dominated by a single employer, such as a
factory, a lumber mill, or a coal mine. Other examples of monopsony
include cities in which a single school board is the sole employer of
teachers or a regional health authority that is the sole employer of nurses.
For our analysis, we will assume the firms in the industry create a hiring
association and thus act as a single buying unit in the labour market—a
monopsonist. We also assume the workers are not members of a labour
union. Remember in this analysis that the monopsonist is on the demand
side and the workers are on the supply side of the labour market.
How does the monopsonist change the outcome in an otherwise
competitive labour market? Figure 14-5 illustrates the situation. In
competition, the equilibrium wage and employment are given by the
intersection of the supply curve and the competitive firms’ demand curve,
which as we saw in Chapter 13 is the MRP curve. But this is not the
outcome that a monopsonist chooses. A monopsonist has market power
and will use this power to maximize its profits—by choosing the wage and
employment where the MRP of labour just equals the marginal cost (