Course Content
Price System, Microeconomy: Consumer Theory
Price System, Microeconomy: Efficiency and market failure, Private costs and benefits, externalities and social costs and benefits
Price System, Microeconomy: Growth and survival of firms; Differing objectives and policies of firms
Macroeconomy: Economic growth and sustainability, Employment, Money and banking
CAIE Alevel Economics (A2)

  • The equilibrium wage rate and employment level occur at the point where the labor demand curve intersects the labor supply curve.
  • At this equilibrium, the quantity of labor demanded equals the quantity of labor supplied, and there is no excess demand or supply in the labor market.
    • shifts in industry supply and demand affect the wage rate
  • For an individual firm, given wage w, it maximizes profits by hiring up to where MCL=MRPL, i.e. the incremental cost by hiring one more labor equals the extra value created
    • thus the firm's demand for labor curve is its MRPL curve
  • The industry's demand for labor curve is the sum of all firms’ demand curve

Reasons for wage differentials in perfectly competitive labour markets

  • Differences in productivity and marginal value of products produced by labour
  • Differences in supply and PES
  • Low pay jobs (e.g. cleaners) often associated with
    • low productivity and/or low value of products;
    • large amount of and highly elastic supply of qualified labour
  • the reverse is true for high pay jobs

Transfer earnings and economic rent are concepts used to analyze the distribution of income in an occupation or industry.

  • Transfer earnings refer to the minimum income necessary to keep a factor of production (such as labor) in its current use.
    • It represents the opportunity cost of using the factor in its next best alternative use.
    • In the context of labor, transfer earnings represent the wage rate that a worker could earn in their next best alternative occupation or industry.
  • Economic rent refers to the income earned by a factor of production (such as labor) that exceeds its transfer earnings.
    • It represents the surplus income or "extra" income earned due to the uniqueness, scarcity, or special skills possessed by the factor.
    • Economic rent is the difference between the actual earnings received by the factor and its transfer earnings.

Factors Affecting Transfer Earnings and Economic Rent in an Occupation:

  • Scarcity and Demand: The scarcity of certain skills or qualifications in an occupation can increase transfer earnings and economic rent.
    • If there is high demand and limited supply for specific skills, workers possessing those skills can command higher wages and earn economic rent.
  • Uniqueness and specialization in certain occupations or industries can lead to higher transfer earnings and economic rent.
    • For example, individuals with rare talents or expertise that are in high demand may be able to earn higher wages and enjoy economic rent.
    • Market power held by workers or labor unions can influence transfer earnings and economic rent.
      • If workers have strong bargaining power or are part of a union, they may be able to negotiate higher wages and secure economic rent.
  • Education and Training: The level of education, training, and qualifications required in an occupation can impact transfer earnings and economic rent.
    • Occupations that demand extensive education and specialized training may have higher transfer earnings and the potential for economic rent.
  • Labor Market Conditions: The overall supply and demand conditions in the labor market can affect transfer earnings and economic rent.
    • In industries with high demand and limited supply of skilled labor, transfer earnings and economic rent may be higher.
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