A monopsony in the labor market refers to a situation where:

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There is a single buyer of labor. A monopsony in the labor market is a situation where there is a single buyer of labor - one employer is the sole source of employment for workers in a particular market. The monopsonist has market power in hiring and can pay a wage below what would prevail in a competitive labor market. Because the monopsonist must raise the wage to attract additional workers, the marginal cost of hiring exceeds the wage, leading to lower employment and wages compared to a competitive labor market.

Many buyers and sellers of labor describes a competitive labor market, which is the opposite of monopsony - in a competitive market, no single employer can influence the market wage. Workers forming a union to negotiate wages describes a labor union or collective bargaining situation, which represents market power on the supply (seller) side of the labor market rather than the demand (buyer) side. The government setting all wages describes wage regulation or a command economy, which is an institutional arrangement rather than a market structure.

Monopsony is a factor market concept tested on the CLEP Microeconomics exam. Students should understand how a monopsonist maximizes profit by hiring where MRP equals marginal factor cost (MFC), why this results in fewer workers hired at a lower wage than in a competitive market, and how monopsony creates deadweight loss in the labor market.

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