11. Labour Markets - Wage Determination in a PC Labour Market

Question 1

How are wages determined in a perfectly competitive market?

Answer 1

In a perfectly competitive market firms are wage takers so must accept the industries wage rate - this wage rate is determined by where demand meets supply - typical equilibrium diagram

Question 2

How do firms make effective economic decisions based on the fixed wage rate?

Answer 2

Individual firms have to accept the market wage rate - totally elastic supply curve = MC curve = AC curve - they employ workers based on where there MRP (downward hook bc of LoDR) crosses there MC (supply)

Question 3

Up to what point will firms employ workers in a perfectly competitive market?

Answer 3

Firms will employ workers up to the point where MRP = MC - beyond this and the cost of each worker would exceed the rev they bring in - before it and another worker would increase rev.

Question 4

What is the diagram for wage determination in a perfectly competitive market?

Answer 4

Normal equilibrium diagram to show industry wage rate - next to it - firm diagram with continued wage rate line = MC = AC = Supply - downward sloping MRP also on diagram - point where MC = MRP = how may workers employed