How Wages are Determined in a Perfectly Competitive Labour Market

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How Wages are Determined in a Perfectly Competitive Labour Market As in other markets, the supply and demand of labour determines the price (wage rate) and the quantity (number of people employed). The labour market is different from other markets (like the markets for goods) in several ways. The most important of these differences is the function of supply and demand in setting price and quantity. In markets for goods, if the price is high, in the long run more goods will probably be produced until the demand is satisfied. However, with labour, overall supply cannot in fact be fixed because people have a limited amount of time in the day, and people are not manufactured. A rise in overall wages…show more content…
A decrease in demand would cause the opposite. An increase in supply, however, would cause a shift down the demand curve therefore lowering wage rates and quantity of labour. A shift in the supply curve of labour could be caused in many ways. If labour became more or less productive, this would cause the MRP curve to move - MRP = Marginal revenue product. This is a theory of wages where workers are paid the MRP to the firm. The price of a substitute could also change i.e. if the price of a substitute goes down, say a certain type of capital, then the demand for that labour will fall. The demand for the product could also change. If the demand for the product could also change e.g. if the demand increases, this would mean a higher price. This in turn would give a higher wage rate as wage is determined by MRP which is MPP(marginal physical product X price). The demand for labour is a derived demand. This means it is decided by how another factor changes e.g. if the demand for a product increases, the demand for labour in that field will increase. If demand for a product increases, this means a higher price and a higher quantity will be produced (for profit maximisation). This would cause the MRP curve to shift outwards, which in turn would mean a higher wage rate, or possibly that more workers are taken on. The

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