Resource Market

Labor Supply & Wage Determination

Wages

Wage

rate

amount $ paid per unit

Nominal

wage

amount of $ paid
Real

wage

value or purchasing power of nominal

wage.

Role of Productivity
Reasons

for higher productivity of

labor
Plentiful capital
Access to natural resources
Advanced technology
Labor quality
Health, education, training of labor

Other factors
Political climate, management, size of
market

Trends of wages
Long

Run trend of real wages

Increased productivity over longer

time period = increase in Demand for
Labor
Consequently, Increase in wages

Perfectly Competitive Labor

Market
Characteristics
Numerous firms compete in hiring a
specific type of labor
Workers have identical skills
Firms & workers are wage takers
take the market wage rate

Market Demand for Labor

Sum

(horizontally) the labor demand curves

(marginal revenue product MRP) of the
individual firms

Market Supply of Labor

Assumption:

workers individually
compete for jobs (no unions)
The greater the wage rate, the more
workers are willing to work
Supply curve (labor market) upward
sloping

TABLE 13.1 Supply of Labor: Perfect Competition in

the hiring of labor (FIRM)

Labor Market Equilibrium

Each

firm will maximize profits/minimize

losses by hiring labor where MRP=MRC
Total Revenue for Firm (for a specific # of
labor units) sum of the MRPs of the units of
labor

EX: firm has 3 workers

#1 = MRP $14
#2 = $13
#3 = $12

Sum

of MRPs = $39 = Total Revenue for Firm

hiring 3 workers

FIG 13.3 (a) Labor supply & demand in perfect competition labor
market
(B) Labor supply & demand in perfect competitive firm

Non-labor cost
(TR-Total Wage Cost)

Total Revenue
0abc
Total Cost
0abc

Total Wage Cost

Firm TR = TC
earns only normal profit