4.1.6.3 Determination of wages and employment in perfectly competitive labour markets

Question 1

Characteristics of a perfectly competitive labour market

Answer 1

1) Each unit of labour is homogenous and unable to influence the wage rate
2) Workers must therefore accept the going wage rate - determined by supply and demand at market level
3) Individual firms are wage takers - if they pay a wage below the equilibrium, workers won’t accept this and will work for rival firms
4) Individual firms maximise profit - by employing the quantity of labour at which MRP = MC (wage rate)
5) Perfect information
6) Freedom of entry to and exit from the industry (No B2E)

Question 2

Elasticity of a perfectly competitive labour market

Answer 2

• Perfectly elastic supply curve - at the ruling market wage - since the each firm can employ all the labour it requires at this rate

Question 3

When deciding how many workers to employ firms…

Answer 3

equate MRP with the MC of employing labour - as they’re profit maximising - which is also the wage rate.