Consider the following statements about a perfectly competitive labour market:
(A) By labour, we mean the hours of work provided by labourers.
(B) Firms are the suppliers of labour and households demand it.
(C) Each firm employs labour up to the point where the wage rate equals the marginal revenue product of labour.
(D) The market demand curve for labour is obtained by adding up the labour demanded by individual firms at different wages.
(E) The market supply curve of labour slopes downward, since some individuals work less at higher wages.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (C) and (D) only
In the labour market, households supply labour and firms demand it. The wage is set where the two curves meet.
(A) By labour, we mean the hours of work provided by labourers. — Correct. Labour means the hours of work, not the number of labourers.
(B) Firms are the suppliers of labour and households demand it. — Incorrect. It is the reverse: households supply labour and firms demand it.
(C) Each firm employs labour up to the point where the wage rate equals the marginal revenue product of labour. — Correct. A profit-maximising firm hires labour till the wage equals MRPL, the extra revenue from the last unit of labour.
(D) The market demand curve for labour is obtained by adding up the labour demanded by individual firms at different wages. — Correct. The market demand for labour is the sum of the demand of all firms at each wage.
(E) The market supply curve of labour slopes downward, since some individuals work less at higher wages. — Incorrect. The market supply curve slopes upward. A few people work less at high wages, but many more join work.
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 … The firm being a profit maximiser will always employ labour upto the point where the extra cost she incurs for employing the last unit of labour is equal to the additional benefit she earns from that unit. The extra cost of hiring one more unit of labour is the wage rate (w). The extra output produced by one more unit of labour is its marginal product (MPL) and by selling each extra unit of output, the additional earning of the firm is the marginal revenue (MR) she gets from that unit. Therefore, for each extra unit of labour, she gets an additional benefit equal to marginal revenue times marginal product which is called Marginal Revenue Product of Labour (MRPL). Thus, while hiring labour, the firm employs labour up to the point where w = MRPL and MRPL = MR × MPL” “Wage Determination in Labour Market … To arrive at the market demand curve from individual firms’ demand curve, we simply add up the demand for labour by individual firms at different wages and since each firm demands less labour as wage increases, the market demand curve is also downward sloping.” “Wage Determination in Labour Market … Nevertheless, the market supply curve of labour, which we obtain by aggregating individuals’ supply at different wages, will be upward sloping because though at higher wages some individuals may be willing to work less, many more individuals will be attracted to supply more labour.” |