6.3

• What is a perfectly competitive labour market?

  A labour market where there are many employers and workers, none of whom can influence the wage rate. Wages are determined by supply and demand
• What are the key characteristics of a perfectly competitive labour market?

  1. Many workers and employers
  2. all workers have the same skills (homogeneous labour)
  3. Perfect information
  4. No barriers to entry or exit
  5. Wage takers (no one can set the wage)
• how is the wage rate determined in a perfectly competitive labour market?

  by the intersection of the market demand and market supply for labour - all firms and workers accept this market wage
• why are firms wage takers in perfect competition?

  because if a firm offers less than the market wage, workers will go elsewhere. if it offers more, it loses money needlessly
• what does the marginal cost of labour equal in perfectly competitive labour market ?

  it equals the wage rate, because each additional worker costs the same
• what is the profit-maximising condition for hiring workers in a perfectly competitive labour market?

  a firm will hire workers up to the point where:

  marginal revenue product (MRP) = wage rate
• why might real-world labour markets not be perfectly competitive?

  because of imperfect competition, trade unions, government interventions, wage discrimination and differences in worker skill
• Average cost of labour definition

  Total wage costs divided by the number of workers employed
• marginal cost of labour definition

  the addition to a firm‘s total cost of production resulting from employing one more worker
• the labour market is a factor market. the supply of labour is determined by those who want to be employed (the employees), whilst the demand for labour is from employers
• what is labour market equilibrium determined by?

  where supply of labour and the demand of labour meet. this determines the equilibrium price of labour i.e the wage rate
• in perfectly competitive labour markets, what does is mean when MRP > W?

  more workers should be hired
• in perfectly competitive labour markets, what does is mean when MRP < W?

  fewer workers should be employed
• in perfectly competitive labour markets, what does is mean when MRP = W?

  profit maximisation is consistent due to right number of workers employed