Answer to Question #261716 in Microeconomics for KayKay

Question

Distinguish the difference between monopsony and monopoly. Provide two graphical

illustrations to aid your discussion when comparing monopsony and monopoly. [6]

Answer 1

A monopsony is when a firm is the sole purchaser of a good or service whereas a monopoly is when one firm is the sole producer of a good or service.

Monopoly restricts output to drive up the price. The monopoly output is less than the competitive output (Q_M < Q_C), and the monopoly price is higher than the competitive price (P_M > P_C). On the other hand, monopsony restricts output to drive down the price (P_M < P_C).