The Labour Market - Economics Unit 1 Revision

The labour market is a factor market.

The demand for labour is derived. This means that the demand is a consequence of demand for something else

The wage rate is seen as the price of labour. If the price of labour is low then firms tend to demand more than when it is high. This is what gives the demand for labour the downward sloping direction.

Apart from the wage rate there are other factors that affect the demand for labour, these will shift the demand curve inwards and outwards. They include:

• Productivity of labour - if they become more productive through new technology this will lead to an increased demand for labour and shift the demand curve to the right
• The demand for its final product - if the demand for the final product decreases then the demand for labour is also going to decrease and the demand curve will shift to the left.

The elasticity of demand of labour can affect the shape of the demand curve. Factors include:

• Extent to which other factors such as technology can be substituted for labour. If it is easily substituted then the demand will be elastic.
• share of labour costs to firms total cost - in service activity firms the wage costs are relatively high so the firm is more responsive to changes in price of labour so demand will be elastic.
• In the short run demand for labour will tend to be inelastic but in the long run it will be more elastic as firms are able to change the factors of production being used.
• It will also depend on the PED for the final product

Labour Supply

The supply of labour will be upward sloping as more people will offer themselves for work as the wage rate increases. 

A number of factors can influence the position of the supply curve, these include:

• rate of unemployment benefits payable - if people are more able to receive benefits then the supply may shift to the left.
• the participation rate (proportion of working age looking for a job or already in employment) - if there is a higher rate then the supply will increase.
• An increase in geographical mobility of labour will increase supply
• other factors such as job security and perks may also have an effect on the supply of labour.

Labour market Equilibrium

Found at where supply meets demand and determines the wage rate for an industry.

If the wage is lower than equilibrium then the firm will offer higher wage to fill vacancies and if the wage is higher than equilibrium then there is excess supply of labour, causing a decrease in wage rate.

Effects of Migration 

With the closer integration of the EU migration is increasing, this will increase the supply of labour. 

Effects of government intervention

• Minimum wage - A NMW above market equilibrium creates excess supply of labour as firms find it too expensive to employ aas many workers as before. This creates unemployment. However the NMW is there to stop exploitation, provide an incentive and alleviate poverty. The affect on unemployment depends whether the NMW is above of below the equilibrium wage rate. 
• Unemployment benefits - if benefits are high then it will reduce the supply of labour as it acts as a disincentive.
• Taxation - if taxes are too high then reduces incentive and therefore supply of labour.

Trade Unions

A trade union is an association of workers that negotiates with employers on behalf of the workers. The three main objectives of trade unions include wage bargaining, improving working conditions and providing job security. It is important to evaluate whether the trade union is in a position to affect any of these in a market.

One of the main criticisms of trade unions are that they have created barriers to entering industires for workers as existing workers have better access to information about how a firm is operating or about vacancies. This greatly affects the flexibility of the labour market by making it harder to firms to adapt to changing market conditions.

Subsidies - Economics Unit 1

A subsidy is a type of benefit given by the government in order to remove some sort of burden and increase the consumption of merit goods. An example is subsidies for wind farm investment in order to encourage them.

Here is a diagram of a subsidy. 

The area of deadweight loss is the cost to society created by market inefficiency. This is because total surplus with a subsidy is under that of when it is in a free market.

The size of the subsidy is the difference between P1 and P2. The cost of the subsidy is whole shaded area. You work it out by finding new equilibrium point taking it across,  then taking it up to original supply curve then taking it across 

Subsidies are usually seen as government intervention when there is an under consumption of a merit good. Therefore a way of solving an externality. I will go into detail on another post.

Tax - Economics Unit 1 + 3

TAX  A tax is a compulsory charge made by the government, on goods, services, incomes or capital.
Reasons for tax:

• Raise government revenue
• reduce inequality
• reduce competitiveness of foreign goods
• influence public spending

Tax - Unit 1:

• Direct tax is tax levied on an individual or organisation ie. income or corporation tax.
• Indirect tax is usually levied on purchase of goods or services. A tax on expenditure.

Indirect tax 

Has two types. Tax raises the price of a good by adding to the supply curve and shifting it left. In unit 1 taxes are used to solve negative externalities. ie. use of cigarettes.

• Ad Valorem tax - charged as a percentage of the price of the good. ie. VAT is 20%. Causes pivotal rotation of supply curve.

• Specific tax - charged a fixed amount per unit of a good. ie. excise tax on wine. Causes a parallel shift of the supply curve. 

The incidence of tax falls on partly the consumer and producer but the majority is dependent a combo of the PED and PES for that good. Goods that have inelastic demand such as addictive products ie. cigarettes, usually the incidence falls mainly on the consumer. This means the firm can pass on a higher price to them as they are willing to pay. 

A diagram shows how the incidence falls.

Here is a relatively even incidence but in some cases it can be heavily on the consumer or heavily on the producers dependent on the elasticities.

Tax - Unit 4:

Two types of tax already mentioned. Indirect is levied on expenditure and direct are those that cannot be passed on to anyone else and levied on income and wealth.

main direct taxes are income, corporation and capital gains. 

Three broad categories for taxes:

• progressive tax - as you get richer you pay more tax ie. income. to redistribute wealth.
• proportional - the percent you pay stays constant. ie. earn 10% more so you're taxed 10% more.
• regressive - the poorer you are the more you pay. ie. VAT, you can argue that as a percent of income they pay more than the rich. 

The Laffer curve

The laffer curve shows that in theory tax gets to a certain level where people pay then when it goes any higher people are disincentivised (due to more income going to government) and tax revenue decreases.

After tax rate of M the revenue starts to decrease, this is showing that people are not incentivised.

Producer And Consumer Surplus

Producer surplus is the difference between what the producers are willing and able to supply and the price they actually receive.

• The producer surplus is shown as the area above the supply curve and below the market price. 
• The level of producer surplus can vary dependent on the shift in supply or demand. 

Consumer surplus is the difference between what you are willing and able to pay and what you actually pay.

• It is the area beneath the demand curve and above the market price. 
• It is a measure of welfare gain for people consuming the good/service
• Consumer surplus varies on the elasticity of demand. When the price is perfectly elastic the price they are willing to pay is the price they actually pay, therefore consumer surplus is 0 and vice versa when demand is perfectly inelastic.
• Consumer surplus also can vary dependent on shifts in supply and demand. Example a higher supply leads to a higher price and therefore a fall in consumer price.

When put together the surpluses look like this.

Income Elasticity Of Demand

YED = Income Elasticity Of Demand

Income elasticity of demand is the responsiveness in demand for a good when there is a change in income levels

Inferior good

YED = % change in quantity / % change in income

If 0-1 then it is inelastic. If it is 1+ then it is elastic.

If the answer is negative (-) then the good is an inferior good. An inferior god is one that as income decreases then demand increases. An example of this could be Tesco value goods.

If the answer is positive (+) then the good is a normal good. A normal good is one when when income rises so does the demand for the product. For example trainers.

Normal good

Cross Elasticity Of Demand

XED - Cross Elasticity Of Demand

XED is the responsiveness of demand for one product following the change in price for another

XED = % change in quantity demand for good B / % change in price of good A

If 0-1 then it is inelastic. If 1+ then it is elastic.

If the number is negative (-) then the two goods are complements. Complements are two goods that go with each other, for example, If the price of a cinema ticket increases then the demand for popcorn will decrease. 

If the number is positive (+) then the goods are substitutes. This means you have one or the other. For example chicken or lamb, if the price of lamb goes up then the demand for chicken will increase. You can have weak and strong substitutes, a strong substitute would be dairy milk or galaxy therefore they will have a high XED.

Ways of lowering XED include branding and differentiating your product therefore there will be less substitutes and you can charge a higher price.

Price Elasticity Of Supply

PES = Price Elasticity of supply

Price elasticity of supply is the responsiveness of supply to a change in price.

PES = % change in quantity supplied / % change in price

If it is between 0-1 then it is inelastic and if its 1+ then it is elastic.

The graph on the right is inelastic supply and the one on the left is elastic.
If it is elastic then the producers are able to increase supply without a rise in cost or time delay.
If inelastic then producers find it hard to change level of supply in a given time period.

What determines whether it is inelastic or elastic?

• Level of spare capacity - if there is lots of spare capacity then the supply curve is elastic as they are able to supply more easily
• State of economy - if economy is in good state then it will be elastic
• Perishability - If a good is hard to store ie. flowers then the supply curve will be inelastic, if it is easy to store then it will be elastic
• Time period - if it is a short time period PES will be inelastic as it is hard to increase output with short notice.

Price Elasticity Of Demand - Economics Unit 1

PED - Price Elasticity of Demand

The responsiveness in quantity demanded for a good following a change in price of the good.

PED = % change in quantity demanded/ % change in price.

If the answer is between +/- 0-1 then the good is said to be inelastic. Examples of inelastic goods include cigarettes, petrol etc. (will go into detail why)

If the answer if +/- 1+ then the good is said to be elastic. Examples of elastic goods include sports cars.

If the PED = 1 then it is said to have unitary elasticity of demand, this means that a 10% change in price will cause a 10% change in demand.

If PED = 0 the good is perfectly inelastic, the demand curve would be horizontal.

If PED = infinity the good is perfectly elastic and the demand curve is vertical.
Factors that affect Price Elasticity Of Demand:

• Whether the good is a necessity or a luxury. If it is a necessary good then PED will be inelastic as a consumer is willing to pay whatever price for it. If it is a luxury then its PED will be elastic because they don't need it
• Availability of substitutes - If there are no substitutes, there is no competition therefore it is inelastic. If there are substitutes then its is elastic
• Addictiveness makes a good inelastic as thy will pay whatever for it. ie. Cigarettes
• Brand Loyalty
• Time frame - if you need a good today then you are more to pay whatever for it so it is inelastic
• % of income spent on good - if its a small percent of your income then it will be inelastic.

If PED is inelastic and and the price increases then total revenue (PxQ) will increase as you are selling at a higher price

If PED is elastic and the price decreases then total revenue (PxQ) increases as selling more at a lower price

Basics - Economics Unit 1

• Economics is how we allocate scarce resources to infinite wants and needs.
• The opportunity cost is the cost forgone from the next best alternative
• Specialisation is the division of labour, this can increase production, reduce average cost however problems include tedium
• Sustainable means meeting the needs of today without affecting the needs for future generations
• A positive statement is one that is a fact as opposed to a normative statement is one that is a value judgement, includes words like 'unfair'.
• scarcity means limited resources
• Factors of production are land, labour, capital and entrepreneurship.
• A free market is one where there is no government intervention and left to the price mechanism. A mixed market economy is the most common where there is government intervention in certain markets. A planned economy is one where the government controls the resources ie. North Korea.
• PPFs show the trade off between 2 goods or services. The opportunity cost changes because it is not a straight line but a curve. A shift of the PPF outwards shows an increase in the productive potential. Can be caused by new technologies or a discovery of new resources ie. new oil field.

Demand - Economics Unit 1

Demand Curve 

• If price goes down, demand goes up and vice versa.
• A change is the price of the product is a movement along the curve from £0.50 to £0.20 shown in the change in demand from 100 to 400.
• Total revenue is PxQ. In example, the total revenue when the price is at £0.50 would be £50 and the total revenue when the price is £0.20 is £80
• When you move along the curve it is either an extension (price fall and extension in demand) or a contraction (price rise and fall in contraction in demand). 

What can cause a shift in demand?

• advertising
• branding
• public relations good or bad
• population growth
• tastes/preferences
• tax
• income
• a change in the price of substitutes (pork or lamb) or change in price of complement (port and apple sauce)

Supply - Economics Unit 1

• Supply of a good is upward sloping - as the price increases the supply increases as the suppliers are willing to supply more.
• A change of price is shown as a movement along the curve.
• A contraction is a decrease in price and an extension is an increase in price.

Factors that shift supply

• Subsidies
• Infrastructure
• Better technology
• Natural disasters
• Weather

Equilibrium - Economics Unit 1

Equilibrium is where the market clears, this means that everything bought to market is sold.

• Where supply and demand intersect

• Excess supply is where supply is greater than demand, this usually causes a cut in price as it moves back to equilibrium.

• Likewise, excess demand is where demand for a product is greater than the supply of the good, this usually causes a price rise.