Diagram. In Figure 10.6 "Labor Market with a Minimum Wage", we see that sellers (the workers who supply labor) would like to sell 50,000 hours of labor to the market at the set minimum wage—that is, 250 more people would like to have a 40-hour-a-week job when the wage increases from $4 to $5. In a similar way to the product market, where the change in the price of a substitute can shift the demand curve, if the price of, say, capital rises (a substitute for labour), then the demand curve for labour will shift to the right. The best example of a situation where there is only one seller of labour is where a trade union manages to control the amount of labour available to the employer. Now suppose that wage rate rises to w0 with the result that income- leisure constraint line rotates to TM1. Minimum wages are fixed in nominal terms and do not automatically change when there is inflation. They may be used to regulate labour markets where workers have excess monopoly power or in an unusual circumstance – such as a period of war. Wage determination in an industry diagram, and all workers will be paid the same. – from £6.99. [25]. With different productivity, different skills and ability, the revenue they obtain for the firm is also different. Unless you can come up with a way to address these issues, the point is invalid. 4 ‘Wage determination in the factor market is just like price determination in the product market.

If the equilibrium wage were $4.00, then the person willing to work for only $4.50 would not be employed.


Demand for a good – downward sloping. You forgot the major advantage of a maximium wage it stops the distortion of the labour market where talented people go into the sector with the highest wage ( financial services) The effect of a reduction in the real minimum wage is shown in Figure 10.7 "A Reduction in the Real Minimum Wage". Why wages differ between occupation – Chief Executive and lower level employee? ( Log Out /  Figure 11.14 displays income-leisure equilibrium of the individual. Now, with TM1 as new income-leisure constraint line, the individual is in equilibrium at point H at which he supplies TL1 work-hours of labour which are less than TL0. Here is a graph showing the supply-demand analysis.

Let's start with the easy model of the perfectly competitive labour market. Thus, if a person chooses combination C, this means that he has OL1 amount of leisure time and OM1 amount of income. [13], 4 (a) How does economic analysis explain the level of wage rates in a perfectly competitive labour market? Perfect labour market – assumptions, how this lead to everyone being paid the same.

In other words, to increase leisure by one hour, an individual has to forego the opportunity of earning income (equal to wage per hour) which he can earn by doing work for an hour. The distance AB is the difference between what the last worker earned for the monopsonist in terms of revenue (the MRP) and what he was actually paid (W1). But when he is already supplying a large amount of labour and is earning sufficient income, further increases in wage rate may induce the individual to demand more leisure so that income effect may outweigh the substitution effect at higher wage rates.

Second, wage rate is the same irrespective of the number of hours he chooses to work. Maximum wage is increasingly becoming a frequent subject of debate in the 21st century as more CEOs and top executives take home millions of dollars in earnings compared to the minimum wage earned by some of the employees in the same companies.

Economists say that the minimum wage would no longer be “binding” in this case. To do this, The equilibrium wage in a perfectly competitive labour market.
[25]. We must do the same here, but this time we are dealing with labour markets rather than product markets.

That is, at wage rate w0 he supplies TL0 amount of labour. The maximum wage for footballers was £14 per week (1951), £15 (1953), £17 (1957) and £20 (1958).

For most industries, the equilibrium wage and quantity of labour employed will be determined where these two curves cross.

and it start with a maximium wage, why does the maximum wage need to be below the market equillibrium(Have a basic knowledge of economics). What happens to the real minimum wage and the level of employment if there is. Deriving the demand curve for labour – MRP = MPP X Price.

Power of the trade union depends upon…. Maximum Price. – A visual guide Hope that helps. On the other hand, the rise in wage rate increases the opportunity cost or price of leisure, that is, it makes enjoyment of leisure relatively more expensive. Which one is right determines whether a maximum wage is morally sound or not (apart form any practical issues both pro and con). Figure 10.6 "Labor Market with a Minimum Wage" illustrates what happens. So if the minimum wage is set at $5 and the price level increases from 1 to 1.1, the real minimum wage declines.
Ignoring the MFC curve for the minute, where would the equilibrium be if this labour market were perfectly competitive? So, how do we interpret this? The opposite would occur if the supply curve were very steep. Figure 10.9 Deadweight Loss from Minimum Wage.

Nevertheless, the theory can provide a basis for understanding more on why wages differ. It will be seen from Figure 11.17 that TM0 is tangent to indifference curve IC1 between leisure and income at point R. Thus, with wage rate W0 the individual is in equilibrium when he enjoys OL0 leisure and therefore he is supplying TL0 work hours of labour. 4 (a) Some top executives and some sports people are paid very high salaries. During recession, C [household consumption] falls.

The additional funds can also be used to create jobs and hire more employees. 3 (a) Analyse whether in a perfectly competitive labour market it is true that a profit maximising firm will employ labour only up to the point where the marginal revenue product of labour is at its maximum. For a look at that history, check out this resource, a 2004 book now available online at In practice, minimum wage laws can price low-skilled workers out of the labor market. AD falls, AD/AS diagram, showing a downward shift of AD. Employment is likely to decrease if wages fall. Downward sloping. Profit maximising firm, MC=MRP. In Figure 10.7 "A Reduction in the Real Minimum Wage", the real minimum wage of $4.55 is still higher than the equilibrium wage of $4.00. What she meant by this was there is no guarantee that the equilibrium wage in the market would in fact be a living wage. Enter your email address to follow this blog and receive notifications of new posts by email. With more people working, more taxes will be paid, which in turn means that the government and society benefits from a reduction in wages of top executives.

Both also depend on the demand and supply forces. They slope downward to the right, are convex to the origin and do not intersect. Change ), You are commenting using your Facebook account.

Companies do prefer more experience workers and willing to pay more for experienced worker.

This action would increase the disposable income of the nation at large and would, in the long term, actually help the company by increasing sales. Court judgement will raise the wage rate. that firms obtain by hiring these workers; it is the difference between the cost of hiring these workers and the revenues that they generate. But firms wish to purchase only 32,000 hours of labor—firms want to hire 200 fewer workers (8,000 fewer hours). As for evaluation, you can say that some of the assumptions apply in the real world, but often, there are more complicated and multiple factors that are not in line with the assumptions.

Reduce unemployment do not conflict with economic growth in the short run. [25]. http://www.greedandgood.org/NewToRead.html, “Firms may find a shortage of skilled workers or top executives, this could harm economic prospects.”.

Neoliberalism is a policy model that is meant to transfer economic control from public to private sectors. 7 (a) Distinguish between supernormal profit and economic rent and consider the circumstances when each occurs.

It is important to note that leisure is a normal commodity which means that increase in income leads to the increase in leisure enjoyed (i.e.

Yet another possibility is that, after the introduction of the minimum wage, the number of people employed stays the same as before (1,000), but those individuals are allowed to work only 32 hours per week. Under what conditions supply curve of labour (i.e.

The idea of a maximum wage can be traced back to Aristotle who believed that no one person in Greece should have more than five times the wealth of the poorest person. Given a similar demand, (mrp), the wage level would change if supply was different in different occupations but it is not the sole factor.”.

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