Question

How is a firm’s wage normally determined in the labor market?

Answer 1

In competitive market the wage rate is determined by the market forces of demand and supply of labour. This implies that firms in competitive market have no control over the wage determination and they have to pay their workers the same rate which is determined by the market.

For firms with market power, the wage rate is determined by the the downward sloping demand function and upward sloping supply function of labour. If there is a monopsony in the market, then downward sloping demand function and upward sloping marginal factor cost function determine the optimum labour and the labour supply function then determine the optimal wage rate.