Chapter 9

Question 1

Define equality

Answer 1

Everyone being treated the same way, in terms of earning the same wages and incomes regardless of their skills and qualifications.

Question 2

Define equity

Answer 2

People are being treated according to their needs; in terms of people who share similar skills, experiences and abilities earn the same salary.

**This is not always the case; male workers earn higher.

Question 3

Relationship between equity and efficiency

Answer 3

Improving one may come at the cost of the other– it’s a trade-off.

To achieve equity, welfare payment will be given low income groups, but this may be demotivating to workers and make them less likely to work and be efficient, leading to poverty trap.

To achieve equity, progressive taxation will be imposed, but this is also demotivating to tax payers and will make them less efficient.

Question 4

Policies to achieve equity in a workfield

Answer 4

Government imposes a legal framework that ensures all individuals in the workspace are being treated fairly; they have equal chances of being promoted, hired, trained and so on.

Question 5

How can efficiency and equity be balanced?

Answer 5

To achieve equity, impose progressive taxation, but at the same time there must be incentives for production, like subsidies.

Invest in healthcare and education for long-run efficiency.

Question 6

Formula for gini cofficient

Answer 6

Area A / Area A + B

0= Full Equality
1= Full Inequality.

Question 7

How can inequality be measured?

Answer 7

Through a graphical illustration known as Lorenz curve. **The more sloped, the higher the inequality.

Or, through a mathematical calculation known as gini-cofficient.

Question 8

Types of poverty

Answer 8

Absolute poverty: Earning below minimum wage and unable to afford basic needs and wants.

Relative poverty: Earning below average wage; poor compared to others.

Question 9

How to measure poverty?

Answer 9

Using headcount ratio, measuring how many people earn below the international poverty line, which is 1.9$ a day.

Question 10

Define international poverty line

Answer 10

A standardized benchmark set by the world bank to measure and be able to compare poverty rates.

Those who earn less than 1.9$ a day.

Question 11

Explain poverty trap.

Answer 11

A situation that arises when there are means tested benefits, and people start lacking the incentive to work since the loss from taxation or inflation outweighs the earnings.

They’d rather be unemployed and get the benefits.

Question 12

Policies to reduce poverty

Answer 12

• Negative income tax: Exempt low income groups from paying taxes.
• Offering transfer payments, which is funded by rich taxpayers.
• Means tested benefits: A benefit paid to people who have low incomes. ex: housing benefits, pensions and child benefits
• Universal benefits: A benefit paid to everyone regardless of their income level. ex: food coupons
• Universal basic income: Fixed monthly income given to everyone regardless of their status.

Question 13

Define marginal physical product

Answer 13

Additional output generated per additional worker hired.

Question 14

Define marginal revenue product

Answer 14

Additional revenue generated per additional worker hired.

Calculation: Marginal Physical product x Marginal Revenue

Question 15

Define Marginal cost of labour

Answer 15

Additional costs paid per additional worker hired.

Question 16

Define marginal resource cost

Answer 16

Additional costs paid per additional resource (FOP) employed, in terms of capital or labour.

Question 17

Explain demand for labour

Answer 17

Considered derived demand as firms demand labour for the output they produce, not for its own sake.

Question 18

Factors that cause a movement in demand for labour curve

Answer 18

Change in wage rate

Question 19

Factors that cause shifting in demand for labour curve

Answer 19

• Derived demand: An increase in demand on a specific product would make firms more likely to demand labour for the output that they produce, not for their own sake.
• Labour productivity: If labour becomes more skilled, qualified and experienced, they are more demanded as they’re efficient and productive.
• Cost of machinery: If machines become expensive, people will demand human labour more.

**- Marginal revenue product theory: If revenues per additional worker are high, employer is more likely to demand them as this allows revenues and profits to increase. (Usually when a high quality good is produced or highly skilled.)

Question 20

Define wage elasticity of demand for labour

Answer 20

Responsiveness of firms towards a change in wage rate.

**How sensitive a firm’s willingness to hire a labour after increase/decrease in wages.

Elastic: Highly sensitive, not willing to pay higher wages.

Inelastic: Not sensitive at all, and would pay no matter what to hire employee.

Question 21

Define elastic demand for labour

Answer 21

A slight increase in wage rate would make employers less likely to demand labour, and might start firing more people.

**Perfectly elastic demand: there are several substitutes for this worker, so if they demand a higher wage, they can get fired and next day a new one will be hired as its a systematic job requiring ZERO skills.

Question 22

Define inelastic demand for labour

Answer 22

A huge increase in wage rate will barely affect employers; they are willing to pay the huge salary, maybe since the employee is very skilled and qualified.

Question 23

Factors that cause demand for labour to be inelastic

Answer 23

• If a worker is highly unique in terms of skills and qualifications.
• If the worker cannot be replaced w/ machinery
• If the product itself is inelastic demand, so employers can easily pass on high wage costs to customers.
• On the short-run, it’d be difficult to replace labour with capital and so on.
• If cost of labour takes a small % out of total costs.

Question 24

Explain supply of labour

Answer 24

Workers who supply their time and skills to work.

Question 24

Factors that cause a movement in labour supply

Answer 24

Change in wage rate

Question 25

Factors that cause shifting in labour supply

Answer 25

- Non-wage factors: Fringe benefits, like healthcare, training, will increase job satisfaction and motivate them to supply themselves. - Skills required, and the cost and difficulty of acquiring them - Wages in other firms; workers are more likely to consider switching if wages are higher in another place. - Demographic factors: if there is a high youth population, supply of labour will increase.

Question 26

Define wage elasticity of supply of labour

Answer 26

Responsiveness of workers towards a change in wage rate; they'd be more encouraged to supply themselves at a higher rate. Elastic: High supply of labour Inelastic: Low supply of labour

Question 27

Define elastic supply of labour

Answer 27

Workers are highly sensitive towards a change in wage rate; a slight increase would cause MANY people to be able to supply themselves since low skills required. **High supply **Perfectly elastic supply: Very high supply in systematic jobs

Question 28

Factors that affect supply of labour elasticity

Answer 28

- Mobility of labour: If there's high geographical mobility, workers are able to travel to work everyday easily, they'd be elastic supply. If there's high occupational mobility, as in their skills are applicable in any job, elastic as well. - Availability of workers (positions): If there's high unemployment, people will be more willing to supply themselves, so elastic - On the long-run, workers are more elastic as they can easily adjust to any circumstance.

Question 28

Define inelastic supply for labour

Answer 28

Workers are not sensitive towards change in wages; a high wage offered will barely affect supply of labour this can be due to low geographical ability. Commuting to work will be difficult, so no matter how high the salary is, they still won't accept. **Low supply of labour

Question 29

Define perfect competition labour market

Answer 29

A hypothetical model that demonstrates a market in which there are many firms competing for workers, and many workers seeking jobs; all of the workers acquire the same skills, qualifications and productivity. In this market, wages and employment levels rely on market forces: the interaction between labour demand and labour supply. No one has any influence or market power, which makes them wage tagers.

Question 30

Characteristics of a perfectly competitive labour market

Answer 30

- Many employers competing for workers, and many workers seeking labour. **Worker can easily move from one job to another - Homogenous labour; all acquire same skills and productivity. **Easy for the firm to substitute them. - Perfect Information - Wage takers - No barriers of entry and exit; workers can freely enter or exit labour market, firms can easily hire or lay off workers. - Wages determined through demand and supply - MC=AC because firm is a wage taker, and cannot hand out higher wages. Also, they all acquire same skills.

Question 31

Wage determination in a perfect competition labour market

Answer 31

A perfectly competitive labour market is a hypothetical model that demonstrates a market where there is a large number of employers competing for workers, and many workers seeking jobs; these workers all acquire the same skills, qualifications, experiences and productivity. In this market, wages and employment levels rely on market forces: interaction between labour demand and labour supply; this makes the market wage takers as they have no influence or market power. Demand for labour is influenced by marginal revenue product; if the additional revenue gained per additional worker hired is high, firms would be more motivated and encouraged to hire more workers as they provide them with higher profits and higher quality goods. Firms will continue to hire until they reach the point where marginal revenue is equal to marginal cost, point of profit maximization. They cannot hire one more unit of labour as this will lead to diminishing marginal returns; there will be decreasing output levels. In a perfect competition market, there are no barriers of entry and exit as well as perfect information, so there is an abundance of firms in the market offering identical job opportunities. Increased competition makes them price takers as there is no dominant firm to control market. Moreover, demand for labour is elastic, meaning that they're highly sensitive towards change in wages. A firm cannot raise wages since they cannot levy increased labour costs onto customer as they're perfectly elastic demand, and they cannot lower wages either as workers will immediately leave and seek another job. Regarding supply of labour, it is directly proportional to wages. An increase in wage will motivate more people to join the labour market and supply themselves to work to earn high salaries and be able to afford their basic needs. Also, if there's an increase in youth population in country, supply of labour will be high as well as they're more active and willing to work. In a perfect competition market, any worker can easily supply themselves with minimal skills, so there is an abundance of workers with same skills, so wages drastically decrease. Workers are unable to demand higher wages because they are not backed up by a trade union to negotiate higher wages, nor is there government intervention by imposing minimum wage. Supply of labour is perfectly elastic demand; there's high quantities and they're extremely sensitive towards the slightest change in wage rate. This is because there's high availability of job opportunities and they all require same requirements, so it will be easy to move from one job to another. And as mentioned previously, demand for labour is elastic demand since firms have multiple substitutes to choose from, workers are not unique, so it will be easy to find a replacement that is readily available. Firms are unable to set their own wages; however, they can choose quantity of labour to hire which is MRC=MRP as seen in the diagram.

Question 32

Define a monopsony market

Answer 32

An imperfect market where there is one buyer of factors of production; in other words, single employer in the market that exploits workers. A monopsonist is a wage-maker, and sets lowest wage possible at MC=MR to maximize profits.

Question 33

Why, in a monopsony market, marginal cost is higher than average cost?

Answer 33

At some point, the firm has hired all workers in the industry, so it reaches out to external workers from outside the industry to hire them. These external workers are paid higher to encourage them to stay; this is known as economic rent as well.

Question 34

Wage determination in an imperfect market

Answer 34

In an imperfect market, wages are not determined according to the traditional way, where it depends on market forces- interaction between demand and supply. It is influenced by firms that have lots of market power, trade unions, government intervention, discrimination and other factors. In any market, demand for labour depends on marginal revenue product, if the additional revenue gained per worker is high, then a firm will be more encouraged to hire more as they'll gain higher profits and will provide high quality production. Most firms aim to continue hiring until the point where marginal revenue meets marginal cost, point of profit maximization. They cannot hire beyond that point due to law of diminishing marginal returns, excessive labour might lead to decreasing output returns, due to overcrowding for instance. This is why demand is downward sloping. Regarding supply of labour, it is directly proportionate with increase in wages. The higher the wages earned the more motivated people will be to enter the market and supply themselves to work. Also, it's influenced by demographic factors, like if the youth population is high, supply of labour would be high as well as they're more active and willing to work. This is why supply curve is upward sloping. In an imperfect market, some firms might have enough market power to be able to influence wages; these are known as monopsonists- single employers. They are wage-makers, and they mostly aim for profit maximization, so they set lowest wage possible as well as hiring lowest quantity, and this is possible at the point where MC=MR. This can be seen in figure 1,1 where it hands out wages at W1. There are some cases where monopsonists must increase their pay as they hire more works, and this is when they hire from foreign industries. They must pay higher than what this specific employee would've gotten in their original industry. It's W2. Regarding trade unions, they also have great influence over wages in the market, and this is done through collective bargaining where the organization negotiates with employers. It can also enforce a closed shop policy where all workers must be members of the union; this strengthens their power and allows them to put specific limits for these works in terms of work hours and so on. Also, trade unions provide training to workers; this makes them more skilled, qualified and unique in the market, so more firms would be willing to hire them and pay them higher wages as their MRP is high. Government intervention can influence wages as well through setting a minimum wage, which is set above equilibrium wage to raise prices for employees. However, this might lead to a negative outcome where firm becomes capital intensive as it's more cost-effective on the long run. Wage determination does not rely solely on productivity, it can also rely on discrimination based on genders, race and so on. Back then, employers used to pay women lower than men due to misogynistic beliefs. However, this is now very rare due to the government intervening by imposing legal framework to ensure achieving equity in workplace. [EVALUATION]

Question 35

Define transfer earnings

Answer 35

Minimum amount of wage required to convince a factor of production, labour, to remain present and not seek an alternative. - Reflects opportunity cost - Area under supply curve **If not present, labour would go elsewhere. BASE MONEY. Example: A teacher earns 40,000$; it has a job opportunity that offered her 35k$, her transfer earnings will start from 35K dollars. **Usually given ONLY to unskilled workers, elastic workers. **PERFECTLY ELASTIC SUPPLY

Question 36

Define economic rent

Answer 36

Extra payment received additional to transfer earnings due to scarcity and unique skills. - Extra and not needed - Area above supply curve **Given to skilled workers **PERFECTLY INELASTIC SUPPLY Example: A teacher is paid 40,000. 35k of these are transfer earnings and the rest are economic rent

Question 39

Explain skilled workers

Answer 39

Skilled workers earn both high transfer earnings and economic rent due to their high scarcity and uniqueness. They are rare in the market, which makes them perfectly inelastic supply. Also, employers are desperate to hire them, so increased demand will cause wages to increase even further as employers are inelastic demand. Skilled workers offer high MRP, which generates higher profits for business.

Question 40

Explain unskilled workers

Answer 40

Unskilled workers earn transfer earnings, earn only enough to convince them to stay and not seek an alternative. They have low MRP as they have low qualifications and skills; this makes them perfectly elastic supply. Due to high number of substitutes, employers offer them low wages as they have systematic jobs, making them elastic demand.