Correct Option
The correct option is 1 and 3 only.
Explanation
The labour market is a specific type of factor market where the services of labour are exchanged. Unlike product markets where firms sell and households buy, the roles in factor markets are reversed based on the ownership of the factors of production.
Statement-wise Analysis
- Statement 1 is Correct: In the labour market, households are the owners of labour power and thus act as the suppliers. They offer their labour services in exchange for wages. Conversely, firms need labour to produce goods and services, so the demand for labour originates from them. This is known as derived demand.
- Statement 2 is Incorrect: The demand curve for labour by a profit-maximising firm is downward sloping, not upward sloping. This is based on the Law of Diminishing Marginal Returns. As a firm hires more labour (while keeping capital constant), the additional output produced by each new worker eventually declines. Consequently, firms are only willing to hire additional workers if the wage rate decreases.
- Statement 3 is Correct: In a competitive labour market, the wage rate is determined by the market forces of supply and demand. The equilibrium wage is found at the point where the upward-sloping labour supply curve intersects with the downward-sloping labour demand curve. At this point, the quantity of labour supplied equals the quantity of labour demanded.
Key Takeaway
Key Takeaway: In factor markets, households supply factors (like labour) and firms demand them. The demand curve for labour is downward sloping due to the diminishing marginal product of labour, and wages are set at the market equilibrium.