Wage determination Flashcards
Define transfer earnings?
-the minimum payment required to keep labour in its current job ie not moving to the next job
Define economic rent?
-a payment received by a factor of production over and above what would be needed to keep it in its present use (transfer earnings) ie the additional revenue a worker gets over and over what he needs to be paid to work somewhere
Define Marginal physical product of labour
MPPL= the additional quantity of output produced by an additional unit of labour input
Define marginal revenue product of labour (MRPL)
The additional revenue received by a firm as it increases output by using an additional unit of labour Ie MPPL multiplied by marginal revenue
How do you calculate MRPL?
MR multiple by MPPL (gives the value of the additional number of products produced from one additional unit of labour)
What is the marginal productivity theory?
The idea that the demand for labour is depends upon balancing the additional revenue gained from employing one more worker against the marginal cost of that unit of labour ie will It cost more to pay the worker than the value of the goods they produce
How does a profit maximising firm choose value of labour inputs?
Marginal cost= marginal revenue/ wage rate is equal to the MRPL, so employing an additional worker must equal the value of the goods they will produce or more (downwards sloping demand curve).
-optimum point is where they are equal
What two things can affect the position of a firms labour demand curve?
Factors affecting the price of the product ie:
technology
efficiency
what are the determinants of economic rent and transfer earnings?
- wage rate
- non monetary factors
- net migration
- elasticity of supply of labour
What does a marginal revenue product curve for a profit maximising firm in perfect competition look like?
- downwards sloping MRPL
- perfectly elastic MC curve (only one wage rate, because firms can’t influence wage rates)
- quantity of labour on x axis
- MRPL on y axis
Why is the demand for labour/ MRPL curve downwards sloping and curved?
Law of diminishing returns- as each new worker is employed the amount of additional output that is produced falls
How does the size of economic rent and transfer earnings change depending on whether the supply curve of labour is elastic or inelastic??
Elastic= most of a persons wages will be transfer earnings and very little economic rent
Inelastic= most of a persons wages will be economic rent instead of transfer earnings, due to a lack of similar high paid jobs
