The determination of relative wage rates and levels of employment in perfectly competitive labour markets

Question 1

State where the labour market equilibrium is and what this determines

Answer 1

where the supply of labour and the demand for labour meet.
- This determines the equilibrium price of labour,

Question 2

When the quantity supplies is greater than the QD, what is this called/ what does this mean and state how we would get back to equilibrium

Answer 2

Excess supply of labour - surplus/ unemployment = means workers are expensive to hire
- unemployed workers desperate a job will have no choice but to accept lower wages, so wages decrease back to equilibrium

Question 3

When the QD is greater than QS, what is this called and state how we can return to equilibrium

Answer 3

• called excess demand or shortage
• firms will have to offer higher wages to get workers to work for them = wages will increase back to equilibrium