To understand marginal expenditure it should be discussed with the topic of Monopsony. Monopsony refers to a market condition where there is only one buyer or consumer. This means that the sole buyer or consumer is the lone buyer of a product in the market. It can be illustrated as: Firm A is the only buyer buying a specific kind of material used for its manufacturing firm, or Firm B is only employing specific skilled workers for its plant. From this, it can be inferred that monopsony is the total opposite of a competitive market. A situation like monopsony often leads to market failure and inefficiency.
In instances where an individual or a business firm comes across the monopsony situation, the monopsony will be free to disburse a price lower for the product than those in the competitive market. On the other hand, a monopsony which seeks out in maximizing its consumer surplus will not give a lower price for the products. In both instances, the monopsony then faces the difficulty of lowering the price to make the most of its consumer surplus. To address this problem, the monopsony uses the concept of marginal expenditure. Marginal expenditure is defined as the change in expenditure which correspondingly results to an increase in the expenditure or purchases of the buyer by one unit.
Marginal expenditure is the added or extra expenditure which the consumer or buyer pays in order to receive additional unit of his desired product or service. This is in accordance with the MP=P* formula, because it is the just rule in addressing monopsony problems. Furthermore, for the consumer or buyer to maximize the consumer surplus he need to buy the quantity where ME=MB. Note also that in a competitive market, the ME of the necessity of buying extra unit of goods is equal to market price or P*. In addition to this, a consumer or buyer in a competitive market does not pay a price lower than that of the P* because of the competition. As such ME is unchanging with the P* in a constant level.
In instances where an individual or a business firm comes across the monopsony situation, the monopsony will be free to disburse a price lower for the product than those in the competitive market. On the other hand, a monopsony which seeks out in maximizing its consumer surplus will not give a lower price for the products. In both instances, the monopsony then faces the difficulty of lowering the price to make the most of its consumer surplus. To address this problem, the monopsony uses the concept of marginal expenditure. Marginal expenditure is defined as the change in expenditure which correspondingly results to an increase in the expenditure or purchases of the buyer by one unit.
Marginal expenditure is the added or extra expenditure which the consumer or buyer pays in order to receive additional unit of his desired product or service. This is in accordance with the MP=P* formula, because it is the just rule in addressing monopsony problems. Furthermore, for the consumer or buyer to maximize the consumer surplus he need to buy the quantity where ME=MB. Note also that in a competitive market, the ME of the necessity of buying extra unit of goods is equal to market price or P*. In addition to this, a consumer or buyer in a competitive market does not pay a price lower than that of the P* because of the competition. As such ME is unchanging with the P* in a constant level.