The economists' model of wage determination in a perfectly competitive labour market
In a perfectly competitive labour market, wages and employment levels are set by labour supply and labour demand meeting at equilibrium. No single employer or worker can influence the wage on their own.
Formula
Wage = MRP (at equilibrium: Labour Demand = Labour Supply)
Real World
In the UK's highly competitive supermarket checkout sector, wages for cashiers at Tesco and Sainsbury's cluster tightly together — no single employer sets the rate, the market does.
Exam Focus
When asked to 'explain' equilibrium wage, state that demand equals supply at that wage and link to the assumptions of the model.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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