In a perfectly competitive labour market, households become willing to supply more hours of work at every wage rate, while the demand for labour by firms does not change. What is the effect on the equilibrium in the labour market?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → The wage rate falls and the hours of labour employed rise
In the labour market, households supply labour and firms demand it. Households now offer more hours at every wage, so the labour supply curve shifts to the right, while the demand curve stays.
At the old wage there is an excess supply of labour, so the wage falls. The new equilibrium has a lower wage and more hours employed, as with a rightward supply shift in a market for goods.
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.” “Summary … With demand curve remaining unchanged when supply curve shifts rightward (leftward), the equilibrium quantity increases (decreases) and equilibrium price decreases (increases) with fixed number of firms.” |