Perfectly Competitive Labour Markets

Perfectly Competitive Labour Markets

Perfectly competitive labour markets

Market equilibrium in a perfect labour market

A labour market: whole market Sall workers

Hourly wage

in the market

Wm

Dall firms in the market

O Labour hours

Perfectly competitive labour markets

Employers and employees in a perfect labour market

Hourly wage

A labour market: individual employer

Slabour

Wm

Dindividual employer O

Q1 Labour hours

A labour market: individual worker

Hourly wage

Sindividual worker

Dlabour

Wm

O

Q2 Labour hours

Perfectly competitive labour markets

The supply of labour

The marginal disutility of hours worked

Disutility

MDU

O Hours worked

The supply of hours worked

Hourly wage

S

O Hours worked

Perfectly competitive labour markets

The demand for labour: Marginal productivity theory

Marginal physical product of labour curve x

Output

Diminishing returns set in here

MPPL O

Q of labour

The profit-maximising level of employment £

MCL= W

Wm

MRPL = MPPL × Pgood

MRPL O

Q of labour

Qe

Deriving the firm’s demand curve for labour £ a

W1

MCL1

b

W2

c

W3

MCL2 MCL3

Profits maximised where MRPL = MCL MRPL O

Q1 Q of labour

Q2 Q3

Deriving the firm’s demand curve for labour £ a

W1

MCL1

b

W2

c

W3

The MRPL curve traces out the demand curve

O

MCL2 MCL3

D Q1

Q of labour

Q2 Q3

Perfectly competitive labour markets

Wages and profits

Wages and profits £

Surplus for firm MCL = W

W

Wages MRPL O

Q of labour

Qe