Question

In a minimum of 175 words discuss how competitive markets determine the wage rate and the quantity of labor that should be employed.

Answer 1

• The competitive markets determine the wage rate of their labour solely based on the demand and supply of labour. The minimum wage rates are then used by the firms in the competitive market to determine the quantity of labour that should be employed.
• When the demand for the labour decreases, the firms in the competitive market decrease the wages of their worker's. Similarly when their demand Increases they increase the wages of their worker's.
• For example, when the steel producing industries start depending on the machine's for finer production of their steel, the demand for labour falls, this will bring down the wages of the worker's. Similarly if the production of steel demands for more labour, they Increase the wage rate.
• Supply of labour is also an another determinant of wage rate in a competitive market. When new jobs require more labour, that is when the demand for labour exceeds the supply, the firms increase the wages to attract more labour. But when more people start to enter the firm, the wages start to fall as the labour supply starts to exceed the labour demand.
• When the market's face higher minimum wage rates, they are reluctant to hire more labour which decreases the quantity of labour employed.
• Similarly when the minimum wages are lower, the firms demand for more labour which Increases the quantity of labour employed.
• Thus, when wage rates are high, the supply of labour Increases but at the same time their demand decreases. Similarly when the wage rates are low, the supply of labour decreases while the demand for labour increases.