Wage Determination Flashcards
What (graphically) determines hours of leisure demanded and labour supplied?
The point of tangency between the budget line and the highest attainable indifference curve.
A decline in wage leads to a change in?
Leisure demanded and in labour supply.
The change can be divided into an…?
Income effect and a substitution effect.
The substitution effect of a wage change on labours supply is always…?
Positive ie. the substitution effect of a rise in the wage always tends to increase labour supply, and the substitution effect of a fall in the wage always tends to reduce labour supply
Is the income effect of a wage change on labour supply positive or negative?
It can be either.
At high wages, the income effect dominates the substitution effect leading to…?
A backward bending supply of labour (it is usually upward sloping)
What is the market supply of labour given by?
Aggregating individuals labour supply curves. (Wage varies and new workers might be drawn into the labour market)
What does Overtime introduce?
A kink in the budget line and ensures that workers will wish to supply more labour.
What does income tax do to the budget line and what may encourage workers to do or not do?
It makes the budget line kinky (it’s only payable over a certain threshold) may encourage workers not to go beyond the kink.
What does the law of diminishing marginal product show?
Eventually the addition of output generated by the last unit of a factor (eg labour) employed declines.
What does multiplying the marginal product of labour (MPL) by the output price give?
The marginal value product of labour (MVPL).
In a perfectly competitive product market, what is given?
The price.
What do firms in a perfectly competitive labour market treat as a given?
That the wage is the marginal cost of labour.
The perfectly competitive, profit maximising firm will employ workers up to the point where?
W=MVPL
The the MVPL is therefore…
The labour demand curve of a perfectly competitive profit maximising firm.
If the firm has monopoly power in the product market, what should the MPL be multiplied by what to give the labour demand curve (marginal revenue product of labour)
The MR (not the price)
Where is the MRP?
The left of the MVP.
Why will a monopoly employ fewer workers than a competitive firm?
Because it produces less output.
If the firm has monopsony power in the labour market, which direction will the MCL slope?
It will be upward sloping.
Where does profit maximisation occur if the firm has monopsony power in the labour market? What is the wage determined by?
where MCL=MRP but the wage is determined by the average cost of labour (= labour supply).
What is the excess supply that minimum wage can generate in a standard model?
Unemployment.
What can minimum wage do to employment in monopsony?
It can raise employment.
Once minimum wage is imposed in monopsony what happens to the MCL?
The MCL becomes the minimum wage, up to the point where ACL passes above it.
