A2 Economics

Aim:  To understand wage determination Objectives:  Define economic rent and transfer earnings  Explain wage determination in perfectly competitive market  Analyse the football labour market

 Who should be paid more, MPs or news readers?

Real Wage Rate Quantity of Labour Q W1 S D1=MRP Real Wage Rate Quantity of Labour Q W1 D1=MRP One Employer in the MarketThe Whole Labour Market

 Each employer passively accepts the ruling market wage rate.  Each firm can hire as many workers as it wishes at the ruling wage rate, but cannot influence it itself.  Provides a yardstick for judging the extent to which real world markets perform efficiently or inefficiently.

 Economic Rent: the payment received by a factor of production over and above that which is needed to keep it in its present occupation.  Transfer Earnings: the minimum payment needed to keep a factor of production in its present use.

 What a factor of production can earn in its next best alternative use. I.e. the opportunity cost of a factor performing its current role.

 Surplus payment over and above transfer earnings.  Total earnings minus transfer earnings.

 E.g. If a footballers’ weekly pay is £10,000 per week, and the next best job he can do is a plumber which pays £500 per week, his economic rent is £9,500 and his transfer earnings are £500.

Real Wage Rate/MRP Quantity of Labour Q W S D=MRP A B Total Earnings = OWQA O Economic Rent = WAB Transfer Earnings = OABQ

 The amount of economic rent earned by individual workers will differ.  First worker would have been prepared to work for much less than the wage rate actually paid, so a high proportion of his earnings will be economic rent.  The last worker to be employed would have been prepared to work only for the given wage rate and so earns no economic rent.

 The proportion of earnings made up of economic rent depends on the elasticity of supply. Economic rent will be a large proportion of earnings when supply is inelastic.

 Premiership footballers earn large economic rents.  Imagine what the next best job for Rio Ferdinand would be….

 Supply will be inelastic as if the changed the wage rate most footballers would continue to supply themselves. Real Wage Rate/MRP Quantity of Premiership Footballers Q1 W1 S D=MRP O

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 Discuss how Trade Unions may influence wage rates and the labour supply?  Do you feel as though the power of trade unions was lessened by Margaret Thatcher?