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Market forces- determine wages in a labour market

wage differentials are the differences in wages between different groups of workers or between workers in same occupation

Reasons why differentials exist:

-workers who are highly skilled tend to be paid more

-workers in different regions and different industries

-trade unions can influence wage rate Paid to a group

Wages more than likely be higher if demand is high and inelastic and supply is low and inelastic

wages tend to be low when demand is elastic and low and supply is high and elastic

economists take into account real wages which takes inflation into account and represent actual purchasing power of peoples wage

in perfectly competitive labour market firms are price taker

Diagram 1- ruling market wage, determined by the forces of demand and supply

Individuals firms have no power to influence the wage level so they're forced to accept the ruling market wage- firms are price takers

Ruling market wage is also individual firms labour supply curve - curve is perfectly elastic- the wage rate is set by the market and the firm can hire as many workers as it wants at this wage rate

Supply curve is also average cost of labour(AC)

Diagram 2, the firm decides to use the quantity of labour Q1, as it q1, it maximises profits( MRP=MC) at M,which is were a firm has optimum number of workers.

In perfectly competitive market- the marginal cost labour is equal to the ruling wage