1.Explain and illustrate how wage and employment levels are determinedin a perfectly competitive market and for an individual firm within thatmarket. 2.Describe the forces that can raise or lower the equilibrium wage in acompetitive market and illustrate these processes. 3.Describe the ways that government can increase wages and incomes.
Figure 12.10Wage Determination and Employment in Perfect CompetitionWages in perfect competition are determined by the intersection of demand and supply in Panel (a). An individualfirm takes the wage W1as given. It faces a horizontal supply curve for labor at the market wage, as shown in Panel(b). This supply curve s1is also the marginal factor cost curve for labor. The firm responds to the wage by employingl1units of labor, a quantity determined by the intersection of its marginal revenue product curve MRP1and itssupply curve s1.Changes in Demand and SupplyIf wages are determined by demand and supply, then changes in demand andsupply should affect wages. An increase in demand or a reduction in supply willraise wages; an increase in supply or a reduction in demand will lower them.Panel (a) ofFigure 12.11 "Changes in the Demand for and Supply of Labor"showshow an increase in the demand for labor affects wages and employment. The shift