ECO1011F

:WORKSHOP 1
MY NAME IS PETRAH
YOUR TUTOR FOR THIS
COURSE
OUTLINE

• EXAM TECHNIQUE

• UNIT 9
• KEY CONCEPTS
• PRACTICE QUESTIONS
EXAM TECHNIQUES

● Pay extra attention to labelling of graphs

● MCQ: the use of the process of elimination
● All diagrams must be carefully labelled
● For Long question: Explain clearly what changes are occurring
Identify and mention the reasons for the
change
● Read questions clearly and take note of phrasing and key
terms and concepts used
UNIT 6 RECAP: THE FIRM AND ITS EMPLOYEES
▸ Economic rent: a payment or other benefit received above
and beyond what the individual would have received in his
or her next best alternative.
▸ Employment rent: the economic rent a worker receives
when the net value of her job exceeds the net value of her
next best alternative (being unemployed).
▸ Labour discipline model: a model that explains how
employers set wages so that employees receive an
employment rent, which provides workers an incentive to
work hard in order to avoid job termination.
THE LABOUR DISCIPLINE MODEL
▸ By raising wages, the firm can increase the cost of job loss 一 and
increase the worker’s effort.
▸ The labour discipline model explains how employers set wages.
▸ The worker’s best response curve is the frontier of the employer’s
feasible set of combinations of wages and effort it gets from its
employees
▹ Slope is MRT
▸ The isocost line for effort is made up of points that have the same
ratio of effort to wages
▹ Slope is MRS
UNIT 7 RECAP: THE FIRM AND ITS CUSTOMERS
HOW DOES A FIRM CHOOSE ITS PRICE
▸ Firms choose price and quantity to maximise profits, taking the
product demand curve and the cost function into account.
▸ Isoprofit curves join all the combinations of price and quantity
that give the same profit
▹ Slope is MRS
▸ The demand curve shows the trade-off the firm is constrained
to make
▹ Slope is MRT
▸ Firms maximise profit where MRS = MRT (or where MC = MR).
UNIT 9: The Labour Market (wages, profits and
unemployment

KEY TERMS WAGE PRICE

AND SETTING SETTING
CONCEPTS CURVE CURVE
POPULATION
UNEMPLOYMENT
When an individual is not in
any sort of paid employment
or self employmennt

Is available for work

Is actively seeking work but

DEFINITION OF cannot find work
UNEMPLOYMENT
By definition excludes
discouraged workers

What are discouraged

workers?
KEY TERMS AND CONCEPTS
▸Nominal wage (W): the actual amount received in payment for
work, in a particular currency.
▸Real wage(w): the nominal wage, adjusted to take account of
changes in prices between different time periods. It measures the
amount of goods and services the worker can buy.
▹Real wage = nominal wage/ price level
▹w = W/P
▸Wage-setting curve: the curve that gives the real wage at each
level of economy-wide employment to provide workers with
incentives to work hard and well.
KEY CONCEPTS AND TERMS
These are
important terms
▸ Price-setting curve: the curve that gives that we will use
the real wage paid when firms choose their when going
profit-maximising price. through our Price
and Wage Setting
▸ Labour market equilibrium: the Curves in more
combination of the real wage and the level depth
of employment determined by the
intersection of the wage-setting and price-
setting curves.
▸ Equilibrium unemployment: the number of
people seeking work but without jobs,
which is determined by the intersection of
the wage-setting and price-setting curves.
 TYPES OF UNEMPLOYMENT
Frictional Structural Cyclical
Unemployment Unemployment Unemployment

Skills mismatch between the increase in unemployment

People are between jobs
the skills required by firms above equilibrium unemployment
and will likely find work.
and those workers have. caused by a fall in aggregate
(Longer periods of demand associated with the
unemployment) business cycle.
MEASURING EMPLOYMENT & UNEMPLOYMENT
Participation rate
▸ shows the proportion of the working age
Consider expanded definitions as well population that is in the labour force
▹ Participation rate = labour
force/working age population
Unemployment rate
▸ shows the proportion of the labour force that is
unemployed
▹ Unemployment rate = unemployed/labour force

Employment Rate
▸ shows the proportion of the working age population that are in
paid work or self-employed
▹ Employment rate = employed/working age population
The Wage Setting Curve
Points below the graph are
not feasible

Points on the curve are the

minimum amount an
employer should pay an Points above the graph are
employee to get effort for a not feasible
specific employment level
THE WAGE-SETTING CURVE
Shifts/MoVEMENTS

Change in reservation wage (Holding

effort constant)
▸Movement along curve

Change in employment rent

(Reservation Wage constant)
▸Shifts curve

Ceteris paribus = Holding other

aspects constant
THE PRICE SETTING CURVE

▸ The firm sets the price (p*) that will

maximise profit and sees how much to
produce (q*).

The wage paid by the firm is the only cost to the

FIRM. (Assumption made for this model. )

▸ The firm sets its price as a markup on its

wage cost, and the price per unit can be
split into the profit per unit and the wage
cost per unit.
WAGES, PROFITS, AND UNEMPLOYMENT IN
THE WHOLE ECONOMY
WHY WILL THERE ALWAYS BE SOME INVOLUNTARY
UNEMPLOYMENT IN EQUILIBRIUM?

▸ There needs to be some unemployment so

that the cost of job loss is greater than zero.
▸ When there is some employment rent, the
firm can motivate workers to put in more
effort on the job.
Demand-deficient unemployment
▸ An increase in unemployment due to the fall in
aggregate demand is called demand-deficient
unemployment.
▸ An outcome where there is demand-deficient
unemployment is not a Nash equilibrium (firms
can do better by lowering the wage).
▸ But firms may not be able to lower the wage
since workers may resist and there is no
guarantee that lower prices will lead to higher
sales and employment.
What is a Nash equilibrium? (Check out link below):
https://www.investopedia.com/terms/n/nash-
equilibrium.asp
RECAP
We look at how the firm sets wages to derive
the wage-setting curve

We consider how the firm sets prices to derive the

price-setting curve.

The intersection of the wage-setting and price-setting

curves determines the labour market equilibrium. There
will always be some unemployment in equilibrium.
KEY CONCEPTS AND TERMS

▸ Gini coefficient: a measure of inequality of any quantity such as

income or wealth, varying from a value of zero (if there is no
inequality) to one (if a single individual receives all of it).
▸ Trade union: an organisation consisting predominantly of
employees, the principal activities of which include the
negotiation of rates of pay and conditions of employment for its
members.
 The distribution of income

▸ The labour market model is also a

model of income distribution in an
economy where there are only
two classes (employers and
employees).
▸ We can construct a Lorenz curve
and calculate the Gini coefficient
using this model (see Unit 5).
LORENZ CURVE
 LORENZ CURVE

Variables of the Lorenz curve

u = fraction of unemployed
n = fraction employed
w = real wage
q = output per employed worker
s = w/q, the wage share received by workers
What happens when labour supply increases?
▸ When labour supply increases, the
wage-setting curve shifts
downward.
▸ Why?
▸ In the case of immigration, there
are long-run and short-run effects
▹ In the short run current
workers are made worse off
▹ In the long run firms can
become more profitable and
workers are no worse off
 TRADE UNIONS

▸ Trade unions can bargain for wages above the wage-

setting curve.
▸ But trade unions cannot determine how many workers the
firm will employ, so there is a trade-off between high wages
and employment.
▸ If employers have a good relationship with unions and
employees, employees may work harder and the best-
response curve can shift up.
▸ The equilibrium outcome in the labour market depends on
the bargaining effect and the union-voice effect.
 POLICIES TO ADDRESS INEQUALITY
AND UNEMPLOYMENT
▸ Policies that affect the price-setting curve
▹ Education and training (APL)
▹ Wage subsidy (Reduce costs of firm)
▹ Both of these can lead to an increase in
equilibrium employment and the real wage
▸ Policies that affect the wage-setting curve
▹ Unemployment benefits - wages and
unemployment can increase (Reservation
wage)
SHIFTS IN THE PRICE SETTING CURVE

▸ Policies that affect the price-setting curve

▹ Education and training (APL)
▹ Wage subsidy (Reduce costs of firm: Reduce prices)
▹ Both of these can lead to an increase in equilibrium
employment and the real wage
▸ Policies that affect the wage-setting curve
▹ Unemployment benefits - wages and unemployment can
increase (Reservation wage)
PRACTICE QUESTIONS
1. Select the group of statements which best describe the real wage.
i. The nominal wage adjusted to take account of changes in prices between
time periods.
ii. The nominal wage divided by the price level.
iii. It is a measurement of a worker’s purchasing power.
iv. The monetary value of the wage the firm pays to the worker.
v. The employment rent the worker receives after taxes.

A. A. Only i, is correct
B. B. Only iii, is correct
C. C. i and iv are correct
D. D. i, ii and iii are correct
E. E. ii, iv and v are correct
2. Based on the graph of the labour market above, ceteris paribus, in which of
the
following cases would the equilibrium real wage level rise?
i. Higher labour productivity.
ii. Higher unemployment benefits.
iii. Higher competition in output markets.
iv. An exodus of immigrant workers.

A. All of the above.

B. i only.
C. i and iii.
D. ii and iv.
E. i, iii and iv.
3. Which of the following is most likely to
reflect a move towards a more equal
distribution of income?

A. The share of total income going to the top 10% of

households rises from 50% to 60%.
B. The Gini coefficient increases from 0.4 to 0.5.
C. The share of income going to the bottom 20% of
households falls from 18% to14%.
D. The share of total income going to the bottom 40%
of households rises from 30%to 40%.
E. None of the above.
4. Which of the following statements is/are correct?
i. The richest 10% of the population earn
approximately 50% of the income.
ii. The gini coefficient = 0.5.
iii. The poorest 20% of the population earn
approximately 50% of the income.
iv. The gini coefficient = 0.36.

A. Only ii is correct.
B. Only iii is correct.
C. i and ii are correct.
D. ii and iv are correct.
E. i, iii, and iv are correct.
EXAMPLES OF SHOCKS