The use of the supply and demand model to analyze labor markets implicitly assumes that there is ____ governing the labor market.

Question

Quizplus · Accepted Answer

The supply and demand model assumes that there are many buyers and sellers, none of whom have significant market power, and that they all act rationally to maximize their own benefits. This is the definition of perfect competition, in which no single buyer or seller can influence the market price. Therefore, the assumption of perfect competition is necessary for the supply and demand model to be applicable in labor markets. The other choices, B) monopoly, C) monopsony, and D) bi-lateral monopoly, all suggest the existence of market power by one or both sides of the market, which would invalidate the assumptions of the supply and demand model.

The Use of the Supply and Demand Model to Analyze