6.3 Perfect competition - labour market Flashcards
Firms are described as wage-takers. Exaplain this. Remember, in perfect competition they can employ as many workers as the wish at the point where market demand meets market supply. All workers are homogenous in a perfectly competitive market. Why is offering above and below the eqm price point WRONG?
They’re wage takers. They cannot alter the ruling market wage rate determined by the point at which market supply of labour meets market supply of labour. A firm has no incentive to provide a wage above the ruling market wage rate. This would NOT be rationale. Similarly, they would not offer a wage underneath the ruling market wage rate as they face a perfectly elastic supply curve. If they offer below the eqm. price point then workers will go to a different firm!
At which point in profit maximised with regards to costs (wage) and the marginal revnue, product of labour. When should more workers be hired and why - think about the diagram. When should less workers be hired - think abou the diagram.
The point at which workers shoulde be hired up until is where the addition to sales revenue resulting for the employment of an extra worker = the addition to production costs resulting from the employment of an extra worker. MRPL = MCL (marginal cost of labour).
a) More workers should be hired when the MRP of the last worker is greater than the wage and total profit would rise if another worker is taken on board.
b) Less workers should be hired when the MRP of the last worker is less than the wage and total profit would decrease since total costs have risen as a result of hiring an extra worker!
