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Factors Determining Wages Beyond Supply and Demand

Question

Consider whether wages are only determined by the market forces of supply and demand. [25]

Category:

Labor Market and Income Distribution

[CIE A level November 2018]

Preview Answer


Step ➊ : Define ‘wages’ in the introduction.


The wage rate can be determined by the market forces of demand and supply. Wages are the price paid to labour for its contribution to the process of production. In a perfectly competitive labour market, the equilibrium wage is determined where the market demand for labour equals the market supply of labour. In this essay, we will discuss whether wages are only determined by the market forces of supply and demand. It will be seen that, in imperfect markets, the demand and supply of labour are affected by other factors such as the actions of trade unions and governments.


Step ➋ : How wages are determined in perfectly competitive markets.


In perfect markets, the wage for labour will be determined through the forces of demand and supply.

➤ 2.1 The demand for labour.

The demand for labour is a derived demand, this, means that labour is not demanded for its own sake but because it is essential for the production of goods or services

The market wage is determined by the marginal revenue product of labour. The marginal revenue that the firm gains from employing one more worker is called the marginal revenue product of labour (MRPL). The MRPL is found by multiplying the marginal physical product of labour (MPPL) and the marginal revenue gained by selling one more unit of output (MR). The marginal revenue product curve is, therefore, the firm’s demand curve for labour

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