Perfectly

Competitive
Labour Markets
Perfectly competitive labour markets

Market equilibrium in
a perfect labour
market
 A labour market: whole market

Sall workers
in the market
Hourly wage

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

Sindividual worker
Hourly wage

Dlabour
Wm

O Q2
Labour hours
Perfectly competitive labour markets

The supply of labour

 The marginal disutility of hours worked

MDU
Disutility

O
Hours worked
 The supply of hours worked

S
Hourly wage

O
Hours worked
Perfectly competitive labour markets

The demand for

labour:
Marginal productivity
theory
 Marginal physical product of labour curve
x

Diminishing returns
set in here
Output

MPPL

O
Q of labour
 The profit-maximising level of employment
£

MCL= W
Wm

MRPL = MPPL × Pgood

MRPL

O Qe
Q of labour
 Deriving the firm’s demand curve for labour
£

a
W1 MCL1
b
W2 MCL2
c
W3 MCL3

Profits maximised
where MRPL = MCL
MRPL

O Q1 Q2 Q3
Q of labour
 Deriving the firm’s demand curve for labour
£

a
W1 MCL1
b
W2 MCL2
c
W3 MCL3

The MRPL curve traces

out the demand curve
D

O Q1 Q2 Q3
Q of labour
Perfectly competitive labour markets

Wages and profits

 Wages and profits
£

Surplus for firm

MCL = W
W

Wages

MRPL

O Qe
Q of labour