Which of the following statements about wage determination in a perfectly competitive labour market is NOT correct?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Firms are the suppliers of labour, and the demand for labour comes from households.
In the labour market the roles of buyers and sellers are the reverse of the goods market.
Option (1) Firms are the suppliers of labour, and the demand for labour comes from households. — False. It is the other way round: households supply labour and firms demand it.
Option (2) The wage rate is determined where the demand curve and the supply curve of labour intersect. — True. The wage is set where the demand for and the supply of labour balance.
Option (3) Labour is measured as the hours of work provided by labourers. — True. Labour means the hours of work, not the number of labourers.
Option (4) Each firm takes the wage rate as given. — True. In a perfectly competitive labour market, no single firm can change the wage.
NCERT (2026-27): “Wage Determination in Labour Market Here we will briefly discuss the theory of wage determination under a perfectly competitive market structure using the demand-supply analysis. The basic difference between a labour market and a market for goods is with respect to the source of supply and demand. In the labour market, households are the suppliers of labour and the demand for labour comes from firms whereas in the market for goods, it is the opposite. Here, it is important to point out that by labour, we mean the hours of work provided by labourers and not the number of labourers. The wage rate is determined at the intersection of the demand and supply curves of labour where the demand for and supply of labour balance.” “Wage Determination in Labour Market … To examine the demand for labour by a single firm, we assume that the labour is the only variable factor of production and the labour market is perfectly competitive, which in turn, implies that each firm takes wage rate as given. Also, the firm we are concerned with, is perfectly competitive in nature and carries out production with the goal of profit maximisation. We also assume that given the technology of the firm, the law of diminishing marginal product holds.” |