14) supply of labour

Question 1

what are non-pecuniary benefits?

Answer 1

benefits offered to workers by firms that are not financial in
nature

Question 2

what is the income effect?

Answer 2

the change in demand for a good or service caused by a change in a consumer’s purchasing power

Question 3

what is the substitution effect?

Answer 3

as prices rise — or income decreases — consumers will replace more expensive items with cheaper alternatives

Question 4

what are transfer earnings?

Answer 4

the minimum payment required to keep a factor of production in its present use

Question 5

what is economic rent?

Answer 5

a payment received by a factor of production over and above what would be needed to keep it in its present use

Question 6

what is the wage elasticity of supply of labour?

Answer 6

a measure of the sensitivity of quantity of labour supplied to a change in the price of wages.

Question 7

what is the WES equation?

Answer 7

% change in quantity of labour supplied/ % change in wages

Question 8

For an individual worker, a choice needs to be made between…

Answer 8

income earned from working and leisure

Question 9

Potential wages are the opportunity cost of…

Answer 9

leisure

Question 10

why is the individual labour supply curve backward bending?

Answer 10

• An increase in the wage rate will encourage workers to substitute work for leisure through the substitution effect

• But the income effect may mean that workers will demand more leisure at higher income levels

• If the income effect dominates the substitution effect, then the individual labour supply curve becomes backwards bending

Question 11

is the industry’s labour supply curve backward bending?

Answer 11

• However, though an individual’s labour supply curve may be backwards bending, the industry supply curve will not because higher wages attract more workers into the industry

Question 12

when is labour supply more elastic?

Answer 12

Labour supply is likely to be more elastic in the long run than the short run as, in the long run, workers can be retrained

Question 13

what factors can shift the supply of labour? MSB

Answer 13

Competitiveness of wages with other industries
o Skills needed and the difficulty of acquiring them
• Number of people with appropriate qualifications/ occupational
• Non-pecuniary benefits
• E.g. Job security / flexible hours / holiday allowance
• Net migration

Question 14

what affects the wage elasticity of supply of labour? SUMGOT

Answer 14

• The skill level required to do the job
• Number of unemployed workers
• Mobility of labour
• Ability of workers to change occupations - occupational mobility
• Ability of workers to move to jobs - geographical mobility
- Time period

Question 15

what are the determinants of economic rent and transfer earnings?

Answer 15

• The wage rate
• Non-monetary factors
• Net Migration
• The elasticity of the supply of labour
  -> skill level required
  -> number of unemployed workers
  -> mobility of labour