Consider the following statements about a perfectly competitive labour market:
(A) The equilibrium wage is where the labour that households wish to supply equals the labour that firms wish to hire.
(B) At a wage above the equilibrium wage, there is an excess supply of labour.
(C) At a wage below the equilibrium wage, firms wish to hire less labour than households wish to supply.
(D) The wage rate is determined using demand-supply analysis, as in a market for goods.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
(A) The equilibrium wage is where the labour that households wish to supply equals the labour that firms wish to hire. — Correct. The wage settles where the hours households wish to supply equal the hours firms wish to hire.
(B) At a wage above the equilibrium wage, there is an excess supply of labour. — Correct. Above the equilibrium wage, households offer more hours than firms want. That is an excess supply of labour.
(C) At a wage below the equilibrium wage, firms wish to hire less labour than households wish to supply. — Incorrect. Below the equilibrium wage, firms wish to hire more labour than households supply. That is an excess demand for labour.
(D) The wage rate is determined using demand-supply analysis, as in a market for goods. — Correct. The wage is found with the same demand-supply analysis used for goods; only the roles of buyer and seller are reversed.
NCERT (2026-27): “5.1 Equilibrium, Excess Demand, Excess Supply … If at a price, market supply is greater than market demand, we say that there is an excess supply in the market at that price and if market demand exceeds market supply at a price, it is said that excess demand exists in the market at that price. Therefore, equilibrium in a perfectly competitive market can be defined alternatively as zero excess demand-zero excess supply situation.” “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 … With an upward sloping supply curve and downward sloping demand curve, the equilibrium wage rate is determined at the point where these two curves intersect; in other words, where the labour that the households wish to supply is equal to the labour that the firms wish to hire. This is shown in the diagram.” |