Question

We saw that a monopolist never produced where the demand for output was inelastic. Will a monopsonist produce where a factor is inelastically supplied?

Short answer

A monopsonist generally avoids inelastically supplied factors to minimize costs.

Step-by-step solution

Understand the Concepts

A monopsonist is a market condition where there is only one buyer. This is similar to a monopolist, which is a single seller. The key concept here is to determine if a monopsonist will purchase where the supply of a factor (like labor or resources) is inelastic.

Analyze Supply Elasticity

Elasticity measures how much the quantity supplied responds to price changes. If it is inelastic, the quantity supplied does not change significantly as the price changes. For a monopsonist, this means they face a steeper supply curve for the factor.

Consider Marginal Costs

A monopsonist focuses on minimizing costs relative to the quantities purchased. The marginal factor cost (MFC) – the cost of purchasing an additional unit of the factor – is what the monopsonist considers, as opposed to a monopolist who considers marginal revenue.

Evaluate Profit Maximization

A monopsonist maximizes profit where the marginal factor cost equals the marginal value product (MFC = MVP). If the factor is inelastically supplied, increasing purchase can significantly raise the MFC, potentially preventing the controller from maximizing profit at lower quantities.

Draw a Conclusion

Given that the MFC can rise drastically if the factor is inelastically supplied, a monopsonist would not typically choose a supply point where the factor is inelastic because it would increase costs more than profits.

Key concepts

Market Condition

A monopsony is a unique market condition where there is only one significant buyer for a resource or service. This setup contrasts with a monopoly, where there is a single seller. In a monopsony, the buyer wields substantial control over the market because they are the primary or sole purchaser, meaning they can influence the price and quantity of the goods or services they are buying.
In industries like labor markets, a monopsony could be a dominant firm hiring the majority of available workers in a region. Such a firm can set wages lower than in a competitive market because workers have limited alternate employment options. This power over the market can result in inefficiencies, where the supply may not meet its full potential due to the single buyer's control over price.
This particular market condition affects how decisions are made, especially regarding where the company should purchase or hire in terms of supply elasticity. The monopsonist aims to drive down costs, and understanding market conditions helps them navigate and strategize effectively.

Supply Elasticity

Supply elasticity refers to how much the quantity supplied of a good or service responds to a change in price. It is crucial in a monopsony because it impacts the supply decisions and pricing strategy of the buyer. When supply is inelastic, it means the quantity available doesn't change much with a change in price. This creates a steeper supply curve in the market.
For a monopsonist, an inelastic supply poses unique challenges and considerations. The steeper curve implies that any increase in quantity purchased results in a higher increase in cost compared to an elastic supply. This situation requires careful calculation and decision-making to ensure cost efficiency.
The inelasticity can limit the monopsonist's ability to control the supply efficiently and maximize profit. Therefore, if the supply of a factor like labor is inelastic, the monopsonist must evaluate whether the increased costs due to rising prices are justified by the benefits of additional resources. This requires understanding the balance between the price effects and the availability of additional units in the supply.

Marginal Factor Cost

The concept of Marginal Factor Cost (MFC) is central to understanding the decision-making process in a monopsony. MFC is the additional cost that arises from purchasing one more unit of a factor of production, such as labor. Since a monopsonist is the main buyer in its market, it influences the market price whenever it buys additional units.
MFC is different from the price paid for an additional unit because every extra unit purchased can raise the market price overall, especially when supply is inelastic. In a monopsony, the cost isn't static and simple as in a competitive market. The demand by the monopsonist can itself shift the cost, hence the marginal factor cost often exceeds the actual factor price with each additional unit.
Understanding and managing these costs is vital for maximizing profits. The monopsonist strategizes to equate the marginal factor cost to the marginal value product (MVP) for optimal efficiency. If purchasing more of a factor dramatically raises the MFC due to inelastic supply, the firm will restrain from buying at high quantities. Thus, the interplay between MFC and supply elasticity guides a monopsonist's purchasing decisions consciously towards cost minimization strategies.