W18(42)_Q4

Consider whether wages are only determined by the market forces of supply and
demand [25]
PART 1

Para 1
Define wage
Assumptions for perfect labour market

Para 2
Explain demand curve using MRP theory

Para 3
Explain law of diminishing marginal returns
Explain that’s why MRP slope downwards

Para 4
Explain supply curve
- how it is aggregated from individual supply curve - hence omit the backward-bending
part
- Why it is upward sloping

Para 5 (Yea, I’m finally answering the question)

Diagram of perfect labour market (Market and Firm)
Explain how they move to equilibrium
- In market, wage rate causes shortage/surplus; mechanism works to clear market
- For firms, profit maximiser, hence increase labour when MR>MC, vice versa

Para 6
Explain changes in demand and supply causes change in equilibrium wage rate

(End of first part - 12 marks in total)

PART 2

Para 7 (Para 1)
Opening statement - in reality, market is imperfect.
First factor - monopsony
Define monopsony
Explain variation of MC and AC of labour
Diagram
Profit maximiser hence firm chooses a point of MC=MRP

Para 8 (Para 2)
Trade union / government minimum wage rate diagram
Define trade union
Mention a new kinked supply curve
Explain surplus / unemployment

Para 9 (Para 3)
Define Bilateral monopoly
Mention new kinked supply curve and MC curve
Incentivised firms to hire more workers
The new equilibrium wage rate and quantity

Para 10 (Para 4)
Conclusion - apply in theory, not in reality.
In reality, many factors can affect wage rate, not just the market force.