A Level Economics AQA Practice Exam

In a perfect competitive labour market, what does the constant wage indicate?

1. Significant market control by a few firms

2. Complete income instability for workers

3. A balance in supply and demand for labor

4. Workers have difficulty finding employment

The correct answer is: A balance in supply and demand for labor

In a perfectly competitive labor market, the constant wage indicates that there is a balance in the supply and demand for labor. This scenario arises because numerous firms are competing for an equally numerous pool of workers, which keeps wages stable and at equilibrium. When demand for labor matches supply at a certain wage level, this creates a situation where firms feel they should pay that wage to attract the necessary workers while workers have no incentive to accept less, thus maintaining a stable wage across the market. In this context, the constant wage reflects that employers can hire as many workers as they need at that wage without experiencing any shortages or surpluses. If there were an imbalance, wages would adjust either upwards or downwards until equilibrium is reached, signifying that demand and supply have aligned effectively. On the other hand, the other options do not accurately describe the characteristics of a perfectly competitive labor market. For instance, significant market control by a few firms would lead to wage disparities and lack of a constant wage, while complete income instability for workers would indicate fluctuating conditions contrary to the stability implied in a competitive market. Lastly, workers experiencing difficulty finding employment suggests a labor surplus or mismatch, which again contradicts the equilibrium implied by a constant wage.