Wage Determination in Perfect Competitive Labour Market –
Equilibrium of demand and supply of labour determines the wage rate. Marginal product of labour plays an important role in determining the demand for labour.
Marginal Revenue Product of Labour: – The marginal revenue product of labour (MRPL) is the change in revenue that results from employing an additional unit of labour, holding all other inputs constant.
The marginal revenue product of a worker is equal to the product of the marginal product of labour (MPL) and the marginal revenue (MR) of output, given by MR×MPL = MRPL. This can be used to determine the optimal number of workers to employ at an exogenously determined market wage rate.
Theory states that a profit maximizing firm will hire workers up to the point where the marginal revenue product is equal to the wage rate, because it is not efficient for a firm to pay its workers more than it will earn in revenues from their labour.
Value of marginal product of labour
- the increase in physical output associated with hiring another employee.
- One is looking for marginal benefits to compare to marginal costs
Effect of Income (Rise or Decline) on Equilibrium of Price and Quantity-
(a) An increase in consumer income leads to a rise in the equilibrium price assuming that the number of firms is constant in the market. Consumers are likely to increase their demand considering a rise in their level of income. A rise in demand causes an increase in the equilibrium price
(b) A decrease in consumer’s income leads to a decline in the equilibrium price assuming that the number of firms is constant in the market. Consumers are likely to decrease their demand considering a decline in their level of income. A decline in the demand causes a fall in the equilibrium price due to the availability of excess supply in the market
Under perfect competition price is determined by the industry on the basis of market forces of demand and supply. No individual firm can influence the price of the product. A firm can takes the decision regarding the output only. So industry is price maker and firm is price taker.
Features of perfect competition:
(a) Very large no. of buyers and sellers.
(b) Homogeneous product.
(c) Free entry and exit of firms in the market.
(d) Perfect knowledge.
(e) Perfect Mobility.
(f) Perfectly elastic demand curve.
(g) No transportation cost.