Equibrium Price/ Wage In Market

Question 0

Consumer surplus

Answer 0

Extra amount of money consumers are prepared to pay for a good/ service above what they actually pay
Utility / satisfaction gained from a good/service in excess of that paid for it
Area above equilibrium price but below demand curve
Welfare people gain from consuming a good

Question 1

Equilibrium

Answer 1

Balance in market

No tendency for price / output to change

Question 2

Producer surplus

Answer 2

Extra amount of money paid to producers above what they are willing to accept to supply a good/ service
Extra earnings obtained by producer above the minimum required to supply good/ service
Area below equilibrium price and above supply curve
Producer welfare

Question 3

Price

Answer 3

Exchange value of good

Question 4

Price mechanism

Answer 4

Way price responds to changes in demand/ supply for a product or factor input which has a signalling/ rationing effect , so that new equilibrium position is reached in market
Principal method of allocation of resources in economy

Question 5

Functions of price mechanism (3)

Answer 5

1) RATIONING DEVICE :
2) INCENTIVE DEVICE:
3) SIGNALLING DEVICE:

Question 6

Tax

Answer 6

Compulsory charge made by gov on goods, services, income or capital
Purpose : raise funds to pay for gov spending

Question 7

Direct tax

Answer 7

Levied directly on individual / organisation

Question 8

Indirect tax

Answer 8

Levied on purchase of goods / services
Represents tax on expenditure which raises production costs of producers and therefore decreases their profitability and willingness to supply
Specific: charged as fixed amount per unit of good ( causes parallel shift of supply curve to left& tax per unit will remain the same at different prices )
Ad valorem: charged as % of price ( causes pivotal rotation of supply curve to left) and tax per unit increases as price increases

Question 9

Incidence of indirect tax
Price inelastic demand and price elastic supply ( e.g. Addictive goods)
Price elastic demand and price inelastic supply

Answer 9

How the fe ta of the indirect tax are borne by consumers and producers

1) tends to place most of tax burden on consumers as producers make prices higher
2) places most of tax burden on producers and may also lead to significant reduction in output and employment

Question 10

Subsidy

Answer 10

Grant given by government to encourage suppliers to increase production of a good / service leading to a fall in price

Question 11

Effect of subsidy
If demand is price inelastic
If demand is price elastic

Answer 11

1) market price falls by relatively large amount increasing the benefits to consumers
2) market price falls by relatively small amount and so there is less gain for consumers

Question 12

Determinants of demand for labour (6)

Answer 12

1) DEMAND FOR FINAL PRODUCT
2) WAGE RATE: fall means labour becomes more affordable and so firms will demand more
3) OTHER LABOUR COSTS: fall in employers national insurance contributions on behalf of their staff will raise quantity demanded
4) PRICE OF OTHER FACTOR INPUTS: labour & capital can be substitutes
5) PRODUCTIVITY OF LABOUR: increase in output per worker may lead to higher revenue & profits encouraging firms to employ more people
6) GOV EMPLOYMENT REGS: becomes easier to hire/ fire staff or to change working conditions

Question 13

Determinants of labour supply (8)

Answer 13

1) WAGE RATE: higher wage means opp cost of leisure time is higher and so people will work longer hours + higher incentive
2) OTHER NET WORK ADVANTAGES: improvements in working conditions, good pension etc
3) NET MIGRATION:
4) INCOME TAX
5) BENEFIT REFORM
6) TRADE UNIONS
7) GOV REGULATIONS : increase in employment protection or NMW will improve working conditions and so increase supply but intro of limits to max hours will reduce
8) SOCIAL TRENDS: e.g. More women working
9) OVERTIME: opportunities to boost earnings that come through overtime payments, productivity related pay schemes and share options schemes are likely to increase the number of people willing to work or the hours they are prepared to work
10) SUBSTITUTE OCCUPATIONS: supply of labour in certain professions will depend on how attractive alternative occupations are
11) INCREASED INVESTMENT IN EDUCATION AND TRAINING : may improve occupational mobility of the labour force to meet changing demands of employers across different industries

Question 14

NMW

Answer 14

Legal minimum hourly rate of pay employer can pay its workers
If NMW is set above the free market equilibrium in particular labour market then it will cause unemployment
If demand for labour is elastic there will be a lot of unemployment
If demand for labour is INELASTIC there will be less unemployment

Question 15

Advantages of increasing NMW (5)

Answer 15

1) Reduction in exploitation of labour and poverty
2) Reduction in wage inequality between men & women
3) reduction in voluntary unemployment since there is more incentive to take up low paid work
4) increase in labour productivity as workers become more satisfied in their jobs and firms may also increase training of workers to increase productivity and justify higher wage
5) keep up with increase in cost of living due to inflation

Question 16

Disadvantages of NMW (4)

Answer 16

1) increases in unemployment since firms find it too expensive to employ labour - workers may be replaced with capital e.g. Self- checkout tills ( depends on elasticity e.g. Wage inelastic demand for labour will lead to relatively few job losses)
2) increase in inflationary pressure as firms pass on extra what costs to consumers
3) not that effective as many poor people do not work and the people benefiting could be students and second wage earners
4) increase in red tape / bureaucracy for firms leading to higher costs and less flexibility in labour market
5) those whose labour is worth less than the NMW due to lack of relevant training / skills will be unable to find employment and so will be forced to live off benefits

Question 17

Signalling device:

Answer 17

Prices perform a signalling function- adjust to demonstrate where resources are required
Price rise and fall reflect scarcities and surpluses
If prices are rising due to high demand it is a signal to suppliers to expand production to meet higher demand thus increasing their revenue
If there is excess supply the
Rock mechanism will help to eliminate the surplus by allowing the market price to fall

Question 18

Rationing effect

Answer 18

Prices serve to ration scares resources when demand in a market outstrips supply
When there is a shortage , the price is bid up leaving only those with the willingness and ability to pay to purchase the product
Equates demand with supply

Question 19

Incentive function

Answer 19

Rising prices act as an incentive for firms to produce mor of a good/ service since higher profits can be earned
Rising prices also mean that firms can cover extra costs involved with increasing output

Question 20

Elasticity of demand for labour

Answer 20

Measures the responsiveness of demand for labour when there is a change in the ruling market wage rate

Question 21

Factors affecting the elasticity of demand for labour

Answer 21

1) LABOUR COSTS AS % OF TOTAL COSTS: when labour expenses are a high proportion of total costs then labour demand is more elastic
2) EASE & COST OF FACTOR SUBSTITUTION: labour demand will be more elastic when firms can substitute quickly & easily between labour & capital inputs
3) PRICE ELASTICITY OF DEMAND FOR FINAL OUTPUT PRODUCED BY A BUSINESS: if demand for good is elastic producers have little power to pass on higher wage costs to consumers through higher price and therefore the demand for labour will be elastic

Question 22

Labour supply

Answer 22

Quantity & quality of hours that labour is willing to supply at a given wage rate
Upwards sloping because as wages rise other workers enter the industry as they are attracted by the incentive of higher rewards

Question 23

Wage differentials (6)

Answer 23

1) COMPENSATING: higher pay can be a reward for risk taking/ poor working conditions/ antisocial hours
2) EQUALISING DIFFERENCE & HUMAN CAPITAL: in a competitive labour market wage differentials compensate workers for opportunity costs and direct costs of human capital acquisition
3) DIFFERENT SKILL LEVELS: market demand for skilled labour grows more quickly than that for semi- skilled workers and this pushes up pay levels , highly skilled workers are often in inelastic supply and rising demand forces up the ‘ going wage rate’ in an industry
4) DIFFERENCE IN LABOUR PRODUCTIVITY & REVENUE CREATION: workers whose efficiency and ability to generate revenue is highest should be rewarded with higher pay
5) TRADE UNION: might exercise their bargaining power to offset power of employer and thus achieve a mark up on wages compared to those on offer to non- Union members
6) EMPLOYER DISCRIMINATION

Question 24

Sticky wages

Answer 24

In case of decrease in demand for labour the real wage level does not fall immediately because employees have wages specified in contracts that cannot be re- negotiated immediately
If wages cannot fall when demand falls it leads to a much greater drop in employment and more importantly involuntary employment because of failure of labour market to clear