Evaluate the likely micreconommic effects of a monopsony operating in a labour market like the supermarket industry

Question 1

KAA1

Answer 1

In a monopsony labour market (e.g., supermarkets like Tesco, Sainsbury’s, Amazon), firms can set lower wages than in a competitive market → Lower labour costs → Greater profit margins → Firms can reinvest profits into technology, expansion, or offering lower prices to consumers → Monopsony power can enhance productive and allocative efficiency for the firm in the short run.

Chain of reasoning (→ arrows):
Monopsony power ↑ → Firms set lower wages → Labour costs ↓ → Profit margins ↑ → Firms invest or pass on savings → Potential efficiency and competitive advantages.

✅ Stakeholder Effects:

Firms (Producers): Higher profits, stronger market position.

Consumers: Benefit from potentially lower prices if firms pass on savings.

Government: Higher corporate profits → More corporation tax revenue.

✅ Real-life Application:

Amazon’s monopsony power over warehouse workers helps it offer fast delivery at low prices → Beating competitors in price wars (2023 data).

Aldi and Lidl’s lower wage structures allowed expansion across the UK with minimal cost increases.

📈 Diagram Suggestion:

Basic supply and demand for labour diagram under monopsony:

Wages set at Wm (below competitive Wc), employment at Qm (below competitive Qc).

Highlight lower cost to the firm at Wm.

COSTS AND REVENUE DIAGRAM,REDUCTION IN AC, INCREASE IN SNP

Question 2

Eval1

Answer 2

In the long term, suppressed wages can harm firm efficiency:

Lower wages may cause low morale, high turnover, and reduced productivity.

Firms could face reputational damage (strikes, bad press) → Consumer loyalty drops → Future costs rise.

✅ Real-life Application:

Tesco faced several worker strikes in 2022 over pay disputes, threatening store operations.

Amazon’s poor working conditions have led to negative headlines, risking brand image despite low prices.

Question 3

KAA2

Answer 3

Monopsonist supermarkets exploit their wage-setting power → Workers are paid below their true economic value (below marginal revenue product) → Leads to lower disposable incomes → Workers’ living standards fall → Can lead to market failure in the labour market (under-consumption of labour).

Chain of reasoning (→ arrows):
Monopsony power ↑ → Wages set below MRP → Worker incomes ↓ → Lower living standards → Increased reliance on benefits → Labour market failure → Welfare loss to society.

✅ Stakeholder Effects:

Workers: Receive lower wages and face less job security.

Government: Higher welfare payments needed (e.g., Universal Credit top-ups).

Consumers: May eventually experience lower service quality if workers are demotivated.

✅ Real-life Application:

GMB Union and Usdaw have repeatedly criticized supermarkets and Amazon for suppressing wages despite strong profits (2023-24).

Many supermarket workers rely on in-work benefits like Universal Credit due to low wages.

📈 Diagram Suggestion:

Labour Market Monopsony Diagram again fits here.

Emphasize the gap between workers’ MRP and the low monopsony wage (Wm).

Question 4

Eval2

Answer 4

Supermarkets offer stable, flexible employment which is valued by many workers (especially part-time students, carers).

Better to have slightly lower wages than high unemployment if supermarkets did not dominate and smaller inefficient firms failed.

✅ Real-life Application:

Tesco and Sainsbury’s provided tens of thousands of stable retail jobs during COVID-19 when other sectors like hospitality collapsed.