[12]. [25]. I’m sure perfect labour markets do not produce wage differentials, so why is this question suggesting that it does? Why is any price above or below the clearing price inefficient? [Marginal Utility theory], Price determination – equilibrium price [demand]. [13]. With different productivity, different skills and ability, the revenue they obtain for the firm is also different. For sure you have invested a lot of your time for students. In our supply and demand analysis, a minimum wage is a simple application of a binding price floor. Companies do prefer more experience workers and willing to pay more for experienced worker. This special case is covered in the Learn-it called 'Trade unions'. AR>AC. Perfectly competitive labour markets – assumptions. Does a higher minimum wage necessarily cost jobs? Much cheaper & more effective than TES or the Guardian. ( Log Out / Conclusion – Economic theory predicts the wage differentials. (b) Discuss how this analysis could be adapted if a trade union intervened in the process of wage determination. Supernormal profit is the amount earn over and above the normal profit. Daisaku Ikeda, Click to share on Twitter (Opens in new window), Click to share on Facebook (Opens in new window), A2 – Economic Efficiency and Market Failure, A2 – Macroeconomics Objectives and Policies, AS – International Trade and Protectionism, AS – Exchange rate, balance of payment, expenditure dampening/switching, A2 – Indifference Curve Analysis and Marginal Utility Theory, A2 – Economic Efficiency and Market Failure, A2 – Macroeconomics Objectives and Policies, A2 – Developmental Economics and National Income, Government Microeconomics intervention – Part 1 (AS unit 3), Micro intervention part 2: Price instability and price control, AS Revision Focus: Public and Merit goods. 2. Real world economies are much more complex so in reality minimal adjustments to minimum wages may not have the effects on unemployment as described above. The curves cross at point A, giving real wage W1 and labour employed L1. However, the general conclusion is widely accepted in principle. Diagram of Minimum Wage on Monopsony. Also remember that the MRP curve was derived from the MPP times the price. Monetary and fiscal policies used to push AD will lead to higher growth rate. Profit maximising firm, MC=MRP. not easy to change job or move to live in another area if higher salary is offered. Your email address will not be published. Here is a graph showing the supply-demand analysis. This may cause unemployment. The statement is true. Can I not do this? Please reply, as my exam is in less than 3 weeks from today, and I’d really like that A*. Governments have tried different types of rent control – keeping the cost of renting below a certain level. [13], a] Wage determination in a perfectly competitive labour market, – many buyers [firms] and sellers [workers], – wages are free to rise and fall, – workers and employers are assumed to be rational, Deriving the demand for labour curve – MRP theory. And labour market will clear. It is known as maximum price or price ceiling when the government sets a maximum legal limit of a price of a particular good or service. Imposition of price controls is one of such interventions. An alternative maybe to reduce the power of monopolies; though in some industries, this is not possible – so maximum prices will be the most effective. There is another one kyoeconomics.wordpress.com . a. SS curve of individual labour – backward bending. totally understood the explanation. Over-supply (butter mountains, wine lakes). [12]. [12], (b) Do you agree that in an imperfect labour market any activity by trades unions designed to increase wage rates would inevitably lead to unemployment in that market? The minimum wage has experienced 22 separate increases, and the most recent increase was enacted by President Obama in 2009. Backward bending segment – higher wages lead to lower hours work. Decision by trade union – minimum wage . We can see how these shifts will affect the equilibrium wage and labour employed. This revision video takes students through a basic analysis of the impact on wages and employment of a minimum wage introduced into the labour market. 3 (a) Do you agree with the view that in a perfectly competitive labour market wages are higher in some occupations than others only because of the differences in the supply of labour? To do this, click here.*. To attempt to raise incomes for producers of goods and services which are essential. While some are not. Court judgement will raise the wage rate. [13]. (b) It is argued that the wage determination in imperfect markets leads to exploitation. We must do the same here, but this time we are dealing with labour markets rather than product markets. N13 3. The opposite would occur if the supply curve were very steep. Able to raise the wage level, and also increase employment at the same time. Deriving the demand curve for labour – MRP = MPP X Price. On the practical aspect, experience worker need not require so much training and also able to solve many unforeseeable problems in the future. Employment is likely to decrease if wages rise. Hello, Structural reform and supply-side policies, aim to make the economy more efficient, generally do not lead to conflicts between price stability, growth, low CAD and low unemployment. The two sentences are the same except for the bits in italics. (b) Governments sometimes aim to reduce the level of unemployment. 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. This could be because of an increase in net immigration, a change in the demographics of the economy or due to government policy, like the New Deal. Adjusted for inflation, the minimum wage has been above the current rate for large parts of the 20th century, with 1968 marking the peak. Where the supply and demand curves cross (point C), giving a wage of W2 and employment L2. Wage is lower that in perfect competition. Explain why it must be MC=MRP to maximise profit. Boston Spa, – Lack of mobility. For example – The EU put tariffs on food to keep prices artificially high. Enter your email address to follow this blog and receive notifications of new posts by email. Fill in your details below or click an icon to log in: You are commenting using your WordPress.com account. – Workers are not homogenous, not equally productive. On the upper, downward sloping segment, this is incorrect. Many have families, need to care for children, old folks, etc. However, both these options have consequences. 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. If a minimum wage was placed equal to W1, it would increase employment to Q1. This occurs at point A, but the real wage rate will not be W3. However, this also paints an important picture about economies: If you increase the price of a resource too far above the market-clearing price you may create shortages. Explaining why certain professions are paid higher than others. It is known as minimum price or price floor when the government sets a minimum legal limit of a price of a particular good or service. This, however, is of little use as all markets are imperfect and the theory has no relevance in such markets. Notify me of follow-up comments by email. If he earned any less he would transfer his labour services to 'another use' (a different job). [12]. A less obvious cause is the situation in other industries. Diagram of MPP, APP and TP. For this to have an effect on market, the price ceiling must be placed below the natural market price. The initial equilibrium is wage W1 and labour L1. This normally leads to a shortage – the quantity demanded will be greater than the quantity supplied. MRP theory – deriving the demand curve for labour. Perfect labour market – assumptions. Just like with the product market, the demand for labour curve will only shift if one of the conditions of demand changes. This means that the 100th worker was only just attracted into the industry. Hope that helps. Wage determination differ. However, in the long run, reducing unemployment by pushing AD may allow many inefficient firms to survive.
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