Key Concept: In a perfectly competitive labour market, the wage rate is set where the quantity of labour supplied equals the quantity of labour demanded. This point is called the equilibrium wage (W*) and the corresponding employment level is equilibrium employment (L*).
Workers decide how many hours to work based on the wage offered and their personal preferences. The supply curve is usually upward‑sloping:
\$W = a + bL\$, where \$a\$ is the minimum wage workers are willing to accept and \$b>0\$ shows how willingness to work increases with wage.
Firms hire workers to produce goods. The demand curve is downward‑sloping because higher wages reduce the quantity of labour firms want to hire:
\$W = c - dL\$, where \$c\$ is the maximum wage a firm is willing to pay for the first worker and \$d>0\$ captures diminishing marginal productivity.
Set supply equal to demand:
\$a + bL = c - dL\$
Solve for \$L\$:
\$L^* = \dfrac{c - a}{b + d}\$
Substitute \$L^*\$ back into either equation to get the equilibrium wage \$W^*\$:
\$W^* = a + bL^* = c - dL^*\$
| Labour (L) | Wage (W) |
|---|---|
Intersection point = Equilibrium |
🎓 Think of a job fair where each stall (company) offers a wage and each student (worker) brings a certain number of hours they’re willing to work. The fair is balanced when the total hours students are ready to give equals the total hours stalls want to hire. The wage that makes this happen is the fair’s “price” for a job.