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Wage Determination

A2 Economics. Wage Determination. Aims and Objectives. Aim: To understand wage determination Objectives: Define economic rent and transfer earnings Explain wage determination in perfectly competitive market Analyse the football labour market. Starter.

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Wage Determination

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  1. A2 Economics Wage Determination

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

  3. Starter • Who should be paid more, MPs or news readers?

  4. Wage Determination in Perfectly Competitive Market Real Wage Rate Real Wage Rate S W1 W1 D1=MRP D1=MRP Q Q Quantity of Labour Quantity of Labour One Employer in the Market The Whole Labour Market

  5. Wage Determination in Perfectly Competitive 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.

  6. Economic Rent and Transfer Earnings • 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.

  7. Transfer Earnings • 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.

  8. Economic Rent • Surplus payment over and above transfer earnings. • Total earnings minus transfer earnings.

  9. Economic Rent and 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.

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

  11. Economic Rent and Transfer Earnings • 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.

  12. Case Study: Premiership Footballers • The proportion of earnings made up of economic rent depends on the elasticity of supply.

  13. Case Study: Premiership Footballers • Premiership footballers earn large economic rents. • Imagine what the next best job for Rio Ferdinand would be…. Rent=£109,750 pw Transfer Earnings£250 pw £110,000 pw

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

  15. Trade Unions • http://www.youtube.com/watch?v=0vUDrUYTsHQ&feature=results_video&playnext=1&list=PL4CEC04390392C406 • http://www.youtube.com/watch?v=nDvGxNkX4AU • http://www.youtube.com/watch?v=wbT5q1Jrfhs&feature=related • 3.29 • 2.00

  16. Trade Unions • 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?

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