How Wages Are Set

1
How Wages Are Set
2
The Circular Flow Model Revisited

• If no is going from the factor market to the
  household, then there is no to buy the product

3
The Circular Flow Model Revisited

• If no is going from the factor market to the
  household, then there is no to buy the product
• Also, if the is too little to the household,
  then they cannot afford the product in the market

4
The Circular Flow Model Revisited

• If no is going from the factor market to the
  household, then there is no to buy the product
• Also, if the is too little to the household,
  then they cannot afford the product in the market
• Relative to the price of a finished product, a
  firm will not pay a worker more than the value of
  a finished product

5
Diminishing Returns

• Firms do not always have the time or ability to
  update their machines or the buildings they
  operate in

6
Diminishing Returns

• Firms do not always have the time or ability to
  update their machines or the buildings they
  operate in
• As a result, the only way to increase production
  is by adding more workers and raw materials

7
Diminishing Returns

• Firms do not always have the time or ability to
  update their machines or the buildings they
  operate in
• As a result, the only way to increase production
  is by adding more workers and raw materials
• At some point, they will reach a limit to their
  facilities, and will not be able to produce
  anymore

8
Diminishing Returns

• Firms do not always have the time or ability to
  update their machines or the buildings they
  operate in
• As a result, the only way to increase production
  is by adding more workers and raw materials
• At some point, they will reach a limit to their
  facilities, and will not be able to produce
  anymore
• This concept is diminishing returns

9
Diminishing Returns

• Following the same example, with each additional
  worker added, you will produce fewer and fewer
  additional products

10
Diminishing Returns

• Following the same example, with each additional
  worker added, you will produce fewer and fewer
  additional products
• This concept is known as diminishing marginal
  productivity

11
Diminishing Returns

• Following the same example, with each additional
  worker added, you will produce fewer and fewer
  additional products
• This concept is known as diminishing marginal
  productivity
• Ex. with 5 workers the firm makes 100 items per
  day (20)

12
Diminishing Returns

• Following the same example, with each additional
  worker added, you will produce fewer and fewer
  additional products
• This concept is known as diminishing marginal
  productivity
• Ex. with 5 workers the firm makes 100 items per
  day (20)
• With 6 workers the firm makes 118 items per day
  (19.6), with 7, 132 (18.85)

13
Diminishing Returns

• Supply of Workers

14
Diminishing Returns

• Supply of Workers
• The higher the average wage, the more people that
  will be willing to look for work

15
Diminishing Returns

• Supply of Workers
• The higher the average wage, the more people that
  will be willing to look for work
• This concept is known as labor force
  participation rate

16
Diminishing Returns

• Supply of Workers
• The higher the average wage, the more people that
  will be willing to look for work
• This concept is known as labor force
  participation rate
• If we were to graph this rate on a chart with
  diminishing marginal productivity, we would be
  able to fined the equilibrium wage rate

17
Diminishing Returns

• Supply of Workers
• The higher the average wage, the more people that
  will be willing to look for work
• This concept is known as labor force
  participation rate
• If we were to graph this rate on a chart with
  diminishing marginal productivity, we would be
  able to fined the equilibrium wage rate
• This is the point where the number of jobs and
  workers are the same, thus setting the wage rate

18
Diminishing Returns

• Comparing Wage Rates

19
Diminishing Returns

• Comparing Wage Rates
• When looking at wages over a time period, you
  need to keep two things in mind

20
Diminishing Returns

• Comparing Wage Rates
• When looking at wages over a time period, you
  need to keep two things in mind
• Money wages are the actual amount of money that
  one receives for their labor

21
Diminishing Returns

• Comparing Wage Rates
• When looking at wages over a time period, you
  need to keep two things in mind
• Money wages are the actual amount of money that
  one receives for their labor
• Real wages refers to how much your money will
  buy