If the equilibrium wage were $4.00, then the person willing to work for only $4.50 would not be employed. Second, wage rate is the same irrespective of the number of hours he chooses to work.

Perfect labour market – assumptions. Minimum wages are fixed in nominal terms and do not automatically change when there is inflation. 11.17 that in this case income effect is stronger than substitution effect so that the net result is reduction in labour supply by L0L1 work-hours and therefore in this case labour supply curve bends backward.

In effect, setting such a policy then, would not lead to a more productive and profitable economy like the advocates believe.
Do you remember that we said earlier that this diagram is the reflection of the monopolist's product market diagram? What if the price of the good being produced fell (due to a fall in real incomes and a shift to the left of the product demand curve perhaps)? Indifference curve analysis can be used to explain an individual’s choice between income and leisure and to show why higher overtime wage rate must be paid if more hours of work is to be obtained from the workers.

Also, if the wages of top earners of a company are tied directly to that of the minimum wage employees in the same company in the form of a ratio, it is believed that the top managers will be incentivized to increase the minimum wage in order to get an increase in pay themselves. Hope you excel in the finals! This shows with change in wage rate from w0 to w1, resulting in leisure becoming relatively more expensive, he substitutes work (i.e. In the short run, some occupations will have higher wages because –. Consider whether these apparently contradictory statements are true in the analysis of the demand for and supply of labour. There is no reason to assume this is the case, and we can already see many systems proving otherwise. Hai.

–          Qualifications eg. Companies do prefer more experience workers and willing to pay more for experienced worker. While leisure yields satisfaction to the individual directly, income represents general purchasing power capable of being used to buy goods and services for satisfaction of various wants. The maximum wage for footballers was £14 per week (1951), £15 (1953), £17 (1957) and £20 (1958). Downward sloping. To break up this wage effect on labour supply, we reduce his money income by compensating variation in income. Wage rate and quantity of labour employed by a firm is determined through the demand and supply of labour of the firm.

The effect of a reduction in the real minimum wage is shown in Figure 10.7 "A Reduction in the Real Minimum Wage". In the first part, explain about wage determination in the perfect labour market, and make sure you explain the assumptions and the implications of each. Placing the maximum wage above the equilibrium would not affect the graph. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. There is another one kyoeconomics.wordpress.com . Conclusion – yes, in general, both price determination and wage determination are dependent on the forces of demand and supply. At the lower real wage, firms are willing to hire more workers.

We can now answer our first motivating question of the chapter: what is the consequence of imposing a minimum wage? – maximum wage – Diagram. The workers are being exploited!

In a market with voluntary trade, no one can force firms to hire workers.

The implication of all this is that the monopsonist pays a lower wage (W1 < W2) and employs fewer workers (L1 < L2) than if the industry had a perfectly competitive labour market. You can review the different kinds of surplus, as well as the concepts of efficiency and deadweight loss, in the toolkit. Thus, L1 number of work-hours supplied is shown against w1 in panel (b) of Figure 11.16.

all of which provide satisfaction to the individual. The statement is true. Thus, MRP = MPP X Price, MRP will also shift to the left. (b) Discuss how this analysis could be adapted if a trade union intervened in the process of wage determination. MRP theory.


I’m sure perfect labour markets do not produce wage differentials, so why is this question suggesting that it does? A maximum wage is a ceiling imposed on how much income a worker can earn in a given period of time. Wage is lower that in perfect competition.