This wage also equals the firm’s marginal factor cost. An individual firm takes that wage as given it is the supply curve s 1 facing the firm. Employment equals L 1 units of labor per period. The wage W 1 is determined by the intersection of demand and supply in Panel (a). The operation of labor markets in perfect competition is illustrated in Figure 12.10 “Wage Determination and Employment in Perfect Competition”. That means that a firm’s choices in hiring labor do not affect the wage. In the context of the model of perfect competition, buyers and sellers are price takers. For one firm, changing the quantity of labor it hires does not change the wage. Because each firm is a price taker, it faces a horizontal supply curve for labor at the market wage. Once the wage in a particular market has been established, individual firms in perfect competition take it as given. Wages are determined by the intersection of demand and supply. Supply in a particular market depends on variables such as worker preferences, the skills and training a job requires, and wages available in alternative occupations. The supply curve for labor depends on variables such as population and worker preferences. We add the demand curves of individual firms to obtain the market demand curve for labor. We have seen that a firm’s demand for labor depends on the marginal product of labor and the price of the good the firm produces.
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