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Quantity of labour (b) Individual firm

Quantity of labour (b) Individual firm

In a purely competitive labour market (panel a), the equilibrium wage rate, Wc, and the number of workers, Qc, are determined by labour supply Sand labour demand D. Because this market wage rate is given to the individual firm (panel b) hiring in this market, its labour supply curve s = MRC is perfectly elastic. Its labour demand curve is its MRP curve (here labelled mrp). The firm maximizes its profit by hiring workers up to where MRP = MRC. Area 0abc represents both the firm's total revenue and its total cost. The green area is its total wage cost; the lavender area is its nonlabour costs, including a normal profit—that is, the firm's payments to the suppliers of land, capital, and entrepreneurship.

Quick Quiz

1. The supply of labour curve S slopes upward in graph (a) because a. the law of diminishing marginal utility applies.

b. the law of diminishing returns applies.

c. workers can afford to buy more leisure when their wage rates rise.

d. higher wages are needed to attract workers away from other labour markets, household activities, and leisure.

2. This firm's labour demand curve d in graph (b) slopes downward because a. the law of diminishing marginal utility applies.

b. the law of diminishing returns applies.

c. the firm must lower its price to sell additional units of its product.

d. the firm is a competitive employer, not a monopsonist.

3. In employing five workers, the firm represented in graph (b)

a. has a total wage cost of $6000.

b. is adhering to the general principle of undertaking all actions for which the marginal benefit exceeds the marginal cost.

c. uses less labour than would be ideal from society's perspective.

d. experiences increasing marginal returns.

4. A rightward shift of the labour supply curve in graph (a) would shift curve a. d = mrp leftward in graph (b).

p 'V ■£ mz ■i chapter fifteen • wage determination, discrimination, and immigration

Market Supply of Labour

On the supply side of a purely competitive labour market, we assume that no union exists and that workers individually compete for available jobs. The supply curve for each type of labour slopes upward, indicating that employers as a group must pay higher wage rates to obtain more workers, because they must bid workers away from other industries, occupations, and localities. Within limits, workers have alternative job opportunities: for example, they may work in other industries in the same locality, or they may work in their present occupations in different cities or provinces, or they may work in other occupations.

Firms that want to hire these workers (here, carpenters) must pay higher wage rates to attract them away from the alternative job opportunities available to them. They must also pay higher wages to induce people who are not currently in the labour force—perhaps doing household activities or enjoying leisure—to seek employment. In short, assuming that wages are constant in other labour markets, higher wages in a particular labour market entice more workers to offer their labour services in that market—a fact confirmed by the upward-sloping market supply of labour curve S in Figure 15- (a).

Labour Market Equilibrium

The intersection of the market labour demand curve and the market supply curve determine the equilibrium wage rate and level of employment in purely competitive labour markets. In Figure 15- (a) the equilibrium wage rate is Wc ($10), and the number of workers hired is Qc (1000). To the individual firm the market wage rate Wc is given. Each of the many firms employs such a small fraction of the total available supply of this type of labour that none of them can influence the wage rate. The supply of this labour is perfectly elastic to the individual firm, as shown by horizontal line s in Figure 15- (b).

Each individual firm will find it profitable to hire this type of labour up to the point at which marginal revenue product is equal to marginal resource cost. This is merely an application of the MRP = MRC rule we developed in Chapter 14.

As Table 15-1 indicates, when the price of a resource is given to the individual competitive firm, the marginal cost of that resource (MRC) is constant and is equal to the resource price. Here, MRC is constant and is equal to the wage rate. Each additional worker hired adds precisely his or her own wage rate ($10 in this case) to the firm's total resource cost. So the firm in a purely competitive labour market maximizes its profit by hiring workers to the point at which its wage rate equals MRP. In Figure 15- (b) this firm will hire qc (five) workers, paying each of them the market wage rate, Wc ($10). So, too, will the other 199 firms (not shown) that are hiring workers in this labour market.

To determine a firm's total revenue from employing a particular number of labour units, we sum the MRPs of those units. For example, if a firm employs three labour units with marginal

THE SUPPLY OF LABOUR: PURE COMPETITION IN THE HIRE OF LABOUR

(1)

(2)

(3)

(4)

Units of

Wage

Total

Marginal

labour

rate

labour cost

resource

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