UNIT III
Question Bank
Q1) Explain the term Wages.
Ans . The term "wages" is defined as the sum of money paid by the employer under the contract to the worker for the rendered services. Wage payment is essentially the price paid for a particular commodity, IE., Labor service. According to the classical theory of wages, labor supply was considered a function of real wages. But according to Keynes, workers irrationally and generally negotiated for money wages, and they reacted sharply against the reduction of money wages. Monetary wages are also called nominal wages. But money wages alone may not give the right idea of what workers really earn; it will determine the standard of living of workers.
Q2) What are the factors that determine the theory of wages?
Ans. The factors that determine the real wage or standard of living of workers are:
(a) The purchasing power of money: the purchasing power of money is used to compare wages in different places and at different times. It is reversed by the price level, that is, the higher the price, the lower the purchasing power and vice versa. Part of the high wages in the UK and North America may be due to the prevailing price increases in those countries/regions.
(b) Subsidiary income: Subsidiary income is the income that an employee has in the form of money or goods, in addition to normal money wages. For example, free boards and accommodation are provided to household servants and peons, professors who earn additional income by marking exam papers, etc.
(c) Extra work without extra pay: If an employee needs to do extra work without compensation, his real wage will be reduced to that extent.
(d) Regularity or irregularity of employment: Regular or safer employment may be given a wage of money, but its actual income may be given a wage of higher money.
(e) Conditions of work: Some professions are healthier than others, and some work hours are shorter than others. All these things are taken into account in the assessment of real wages.
(f) Future prospects: if there is a good prospect of rising in the future, a low money income is considered a high real wage.
Q3) Define Subsistence theory.
Ans. This theory originated from the Physics School of French economists and was developed by Adam Smith and later economists of the classical school. The German economist Lassar used to call it the Iron Law of wages or the brazen law of wages. Karl Marx made it the basis of his theory of exploitation.
According to this theory, wages tend to settle at a level sufficient to keep workers and their families at a subsistence level. When wages exceed the self-sufficiency level, workers are encouraged to marry and have large families. The mass supply of Labor reduces wages to the level of self-sufficiency. If wages fall below this level, marriage and childbirth will be discouraged, and lack of nutrition will increase mortality. Eventually, the labor supply will decrease until wages rise again to the self-sufficiency level. It is believed that the supply of Labor is infinitely elastic, that is, as the price offered (that is, wages) increases, its supply increases.
Q4) What are the Criticism of subsistence theory?
Ans. Criticism of above theory:
This theory is almost completely obsolete, and there is no such practical application, especially in developed countries. This theory was based on the Malthus theory of the population. It would be inappropriate to say that with each increase in wages, the rise in the birth rate must necessarily continue. Higher living standards may follow, followed by higher wages.
- Ricardo was one of the indices of subsistence theory. He emphasized the influence of habits and habits in determining what workers need. But habits and habits change over time. Therefore, the theory cannot hold good for a longer period, especially in a world characterized by rapidly changing habits. Therefore, Ricardo acknowledged that in an improving society, wages could exceed the self-sufficiency level indefinitely.
- The second criticism of this theory is that the self-sufficiency level is more or less uniform for all working classes, with certain exceptions. Therefore, theory does not explain the difference in wages in different jobs.
- The third criticism is that this theory explains wages only with reference to supply, and the demand side is completely ignored. On the demand side, the employer must take into account the amount of work that the employee gives, not the self-sufficiency of the worker.
- The fourth criticism is that the theory does not account for wage adjustments over the lifetime of generations and for wage fluctuations from year to year.
- The fifth and final criticism is that the term "subsistence" has a very vague impression. Does it refer to the minimum requirements of modern man or tribal Barbarians?
Q5) Explain the criticisms of marginal productivity theory
Ans. Criticisms of marginal productivity theory:
This theory is true only under certain assumptions such as perfect competition, complete mobility of Labor, homogeneous character of all labor, constant interest and rent, given price of products, etc. It's a static theory. The real world is dynamic. All assumptions are unrealistic. Criticism of this theory is as follows:
- According to this theory, labor is fully mobile and can move from one employment to another, but this is not true in the real world.
- According to this theory, there is a uniform wage rate throughout the market, which is impossible. Workers with the same skills and efficiency cannot receive the same pay in two different locations.
- In the case of monophony, i.e., one buyer and many sellers, the employer has a grip on wages and can pull down wages below the value of the marginal net product of Labor. If the employees are collectively organized, then the wage rate can be negotiated. Thus, wages are determined not only by the number of employed workers, but also by the relative bargaining power of the Union and the employer.
- Another assumption of this theory is that there is a perfect competitive market existence for the product, which is also an unrealistic assumption. In the real world, the market of goods is characterized by incomplete competition. This also destabilizes the theory.
- It should be noted that the marginal net product of Labor depends not only on the supply of labor, but also on the supply of all other production factors. If other factors are abundant and labor is relatively small, then the marginal product of Labor is higher, and vice versa.
- This theory regards the supply of labor as the norm. Productivity is also a function of wages. Low productivity can be a source of low wages that can signal workers ' efficiency, lower living standards and ultimately check the supply of Labor.
Q6)What are the factors that determine demand for labor?
Ans. The factors that determine the demand for labor are:
a) Derivative demand: demand for Labor is derivative demand. It is derived from the demand for goods that it helps to produce. The greater the consumer demands for the product, the greater the producer's demand for the labor required to produce the goods. It may be observed that it is the expected demand, and not the existing demand for the product that determines the demand for Labor. Therefore, the expected increase in demand for products will increase the demand for Labor.
b) Elasticity of labor demand: the elasticity of labor demand depends on the elasticity of commodity demand. According to this theory, if wages are formed only a small percentage of total wages, then the demand for labor become generally inelastic. On the other hand, if the demand for the product is also elastic, or if cheaper alternatives are available, then the demand will be elastic.
c) Price & quantity of cooperating factors: the demand for Labor also depends on the price and quantity of cooperating factors. If the machine is expensive, then the demand for Labor will increase. The greater the demand for cooperative factors, the greater the demand for labor, and vice versa
d) Technical progress: Another factor affecting labor demand is technological progress. In some cases Labor and machineries are used in clear proportion
Q7) Mention the three destinations of Labor.
Ans. Labor can supply three destinations:
- Labor supply to enterprises: For a particular enterprise, at the current wage rate, the labor supply is completely elastic because it can engage as many workers as you want. Its own demand is only a very small part of the total supply of Labor. Thus, the labor supply curve of the enterprise is a vertical straight line.
2. Labor supply to industry: For the industry as a whole, the supply of Labor is not infinitely elastic. If the industry wants more labor, it will attract the industry by providing high wages. Labor supply to industry is subject to the supply law, that is, the supply law. The supply varies directly with the price, which means a small supply of low wages and a large supply of high wages. Thus, the supply curve of labor for industry is tilted upward from left to right.
3. Labor supply to the economy: The supply of labor for the entire economy depends on economic, social and political factors or institutional factors, for example, the attitude of women to work, the working age, the age of school or university and the possibility of part-time employment for students, the size and composition of the population and gender distribution, the attitude to marriage, the size of the family, contraception, etc. Over a short period of time, the reduction in wages may not cause any decrease in the supply of Labor. But if wages are too low, competition among employers themselves will push them up. Even over a long period of time, the supply of Labor is not very elastic. A certain minimum wage, where Labor does not work at all, is below. If this minimum is exceeded, the supply of labor increases as the wage rate increases. But this only happens to the point when the increase in wages leads to a decrease in the supply of Labor. Again, after the point, this trend will be reversed if we consider that workers can move on to a higher level of life. Thus, an increase in wages can lead to an increase or decrease in the supply of Labor. It depends on the relative assessment of the goods and leisure of the worker.
Q8) Define Wages under incomplete competition.
Ans. Wages under incomplete competition:
Incomplete competition may arise:
(A) Bilateral monopoly: When strong employer associations are faced with strong labor organizations.
(b) Monophony: when an industrial employer or a group of employers occupies a very strong monopoly position in comparison with Labor.
(a) Bilateral monopoly: the term “bilateral monopoly “applies to both goods and labor. This applies to situations where the monopoly of purchases coincides with the monopoly of sales, that is, a single monopoly facing a single monopolist. Monopolies want to operate on a scale where marginal costs are equal to marginal revenues. Monopolists, on the other hand, want to buy an amount whose marginal cost is equal to marginal utility. This indicates the best price for the buyer and the best price for the seller. There is no economic principle for determining equilibrium prices.
(b) Monophony: whereas Labor occupies a very weak position in comparison, this is the most common situation of incomplete competition in which the employer embodies the concentrated monopoly power of being the sole purchaser of labor in his person. Monophony also wants to ensure that big employers are in a position to influence wages
Q9) How are labor exploited?
Ans. There are three types of labor exploitation:
(a) Monophonic exploitation: where a single employer has the strongest impact on wage rates.
(b) Exclusive exploitation: in this state, there is complete competition in the labor market, but incomplete competition in the product market. In equilibrium, the company equates wages with marginal revenue products. This means that Labor is paid less than the value of marginal products, which indicate exploitation.
(c) Double exploitation: occurs when there is incomplete competition in both the labor market (monophony) and the product market (monopoly). Thus, there is a double exploitation of unitary and monopolistic labor, in which Labor is most exploited.
Q10) Explain the causes of differences in wages in different jobs, professions and regions.
Ans. The causes of differences in wages in different jobs, professions and regions are as follows:
- Difference in efficiency: that is, the difference in the conditions under which education, training and work are performed
B. The presence of non-competing groups: these groups arise due to difficulties in the way of the movement of labor We can see that this wage, or NH, is less than the marginal income productivity, which is NE. So each worker gets EH less than this marginal income product. This is a measure of labor exploitation under monophony. This is called"monopsonic exploitation “by Mrs Robinson. Thus, under monophony, wages are lower, and employment is less than under full competition in the labor market. Under perfect competition, the equilibrium would have been C where the supply curve AW cuts the demand curve MRP. At this point, wages would have been higher in OW'(=N'C) and the labour employed would have been greater in ON’. From low-wage to high-wage employments. Following are the reasons:
C. Difficulty in learning Trade: few people can master difficult trade. Their supply is less than their demand, and their wages are higher.
D. Differences in comfort or social respect: disgusting employment must pay higher wages to attract workers. If a disgusting job is done by unskilled workers who cannot do anything better, wages can be quite low, for example, a sweeper.
E. future prospects: if a profession provides an opportunity for future promotion, people will accept a low star in it, as well as another profession offering a higher initial reward, but will not be able to do so.、
F. Dangerous and dangerous occupation: generally offers higher emoluments.
G. Regularity or irregularity of employment: it also has a strong effect on the level of wages.
H. Collective Bargaining: differences in the strength and militancy of trade unions also explain differences in wages in different industries.
Q11)Summarize the theory of Interest and Employment.
Ans. This theory can be summarized in the following proposition:
(1) In a given situation of technology, resources and costs, income (both monetary and real income) depends on the amount of Employment N.
(2) the relationship between the income of the community and what can be expected to be spent on the consumption specified by D1 depends on the psychological characteristics of the community, which is to say, consumption depends on the level of gross income, and therefore on the level of Employment N, unless there is some change in the consumption trend.
(3) The amount of labor that an entrepreneur decides to hire N depends on the sum of D1, which is the amount that the community is expected to spend on consumption, and D2, which is the amount that it is expected to spend on new investments. D is what we called above effective demand.
(4) D1+D2=D=σ(N), where σ is the aggregate supply function, and as seen in(2)above, D1 is a function of n, and we can write σ(N) depending on the consumption trend, so σ(N)-σ(N)=D2.
(5)thus, the amount of employment in equilibrium depends on(i)the total supply function σ, (ii)the consumption trend σ, and(iii) the amount D2 of investment.
(6) For all values of n, there is the corresponding marginal productivity of labor in the wage property business, and it is this that determines the real wage. Thus, (5) is subject to the condition that n cannot exceed the value that reduces real wages equally to the marginal disadvantage of Labor. This means that all changes in d are incompatible with the temporary assumption that money-wages are constant. Thus, eliminating this assumption is essential for the full statement of our theory.
(7)in the classical theory, if D=σ(N) for all values of N, then the amount of employment is in a neutral equilibrium that is less than its maximum for all values of n, and the force of competition among entrepreneurs is expected to push it to this maximum. Only at this point, in the classical theory, a stable equilibrium can exist.
8. The key to our practical problems is in this psychological law. From this we can conclude that the larger the amount of employment, the gap between the total supply price (Z) of the corresponding output and the sum (D1) that entrepreneurs can expect to recoup from consumer spending.
Q12) Write short note on Principle of Effective Demand.
Ans. Principle of Effective Demand: Before Keynes, no satisfactory explanation was given of the factors determining the level of employment in the economy. Economists mostly assumed the prevalence of the state of full employment by believing in Say's law of markets, an old proposition that states that all income is spent automatically or that the level of effective demand is always sufficient to lift all goods and services, products from the market.
There were many economists who challenged the assumptions and logic of Say's Law. For example, T.R. Malthus endeavored to convince contemporaries that demand in general may not match supply in general and the shortage of aggregate demand could cause general overproduction and thus general unemployment. But Malthus failed to explain how actual demand could be lacking or excessive. It was Keynes who for the first time proposed a systematic and convincing theory of employment based on the "Principle of Effective Demand". The idea behind this theory is not difficult to grasp.
Q13) Define Keynes’s Principle of Effective Demand.
Ans. Keynes’s Principle of Effective Demand:
The principle of "effective demand" underlies Keynes's analysis of income, production and employment. Economic theory was radically changed with the introduction of this principle. In short, the effective demand principle tells us that in the short run, an economy's aggregate income and employment are determined by the level of aggregate demand that is satisfied by aggregate supply. Total employment depends on total demand. As employment increases, income increases. A fundamental principle of the propensity to consume is that as the real income of the community increases, consumption will also increase but less than income.
Therefore, to have enough demand to support an increase in employment, there must be an increase in real investment equal to the gap between income and consumption of that income. In other words, employment can only increase if investment increases. We can generalize and say; a certain level of income and employment can only be maintained if the investment is sufficient to absorb the savings of that level of income. This is the heart of the principle of effective demand
Q14) What is the Importance of the Concept of Effective Demand?
Ans. The principle of effective demand is an integral part of Keynesian employment theory. The general theory has the basic observation that aggregate demand determines total employment. A lack of effective demand leads to unemployment. The principle of effective demand is important in the following points. First, it can be said that with the help of the concept of effective demand, Say's market law was rejected. The concept of effective demand has shown beyond any doubt that whatever is produced is not automatically consumed and income is not spent in such a way that the factors of production are fully used. Second, an analysis of effective demand also reveals the inherent contradictions in Pigou's plea that wage cuts will eliminate unemployment. Keynes believes that wage cuts may or may not increase employment as the level of employment depends on the level of real demand.
Third, the effective demand principle could explain how and why depression might persist. Keynes explained that effective demand is consumption and investment. As employment increases, so does income, leading to an increase in consumption, but by less than the increase in income. Thus, consumption lags and becomes the main reason for the gap that exists between total income and total expenditure in order to maintain effective demand at an earlier (or original) level, namely a real investment that corresponds to the gap between income and consumption, it has to be done. In other words, employment can only grow if investment increases. Here the principle of effective demand has the greatest importance. It makes it clear that investments rule the quarter. Fourth, the demand side is moving into the spotlight. In contrast to the classic emphasis on the supply side, Keynes placed great emphasis on the demand side and attributed fluctuations in employment to changes in demand. Effective demand theory illustrates how and why aggregate demand becomes deficient in a capitalist economy, and how a lack of effective demand leads to depression.
Q15) How can you explain Determinants of Effective Demand?
Ans. To understand Keynes' employment theory and how employment equilibrium arises in the economy, we need to understand the determinants of the aggregate demand function and the aggregate supply function and their interrelationships.
- Aggregate Demand Function and
- Aggregate Supply Function.
1. Aggregate Demand Function: The aggregated demand function relates each employment level to the expected revenue from the sale of production from this employment volume. How high the expected sales revenue will be depends on people's expected spending on consumption and investment. Every producer in a free enterprise economy tries to estimate the demand for his product and calculate in advance the profit that will likely be made from his sales proceeds. The total sum of the income payments to the production factors in the production process forms its factor costs. The factor cost and the entrepreneur's profit thus give us the total income or the proceeds that result from a certain amount of employment in a company. Keynes brought this idea into macroeconomics. We can calculate total income or total sales revenue. This total income, or the total revenue expected from a given amount of employment, is called the "total demand price" of the production of that amount of employment; H. It represents expected revenue when employees are offered a certain volume of employment.
Entrepreneurs make decisions about the amount of employment they offer the job based on sales expectations and expected profit, which in turn depend on an estimate of the total money (income) they will get from selling goods that are manufactured at different levels of employment. The sales revenue they expect is the same as what they expect from the community for their production.
2. Aggregate Supply Function:
The total offer relates to the production of companies. Entrepreneurs, in providing jobs for workers, need to be sure that the output they produce is sold out and that they are able to meet their production costs and also achieve the expected profit margin. A company's production can be sold at different prices depending on market conditions. However, there is some income from the output for which the entrepreneurs feel that it is only worthwhile to provide a certain amount of jobs. The expected minimum sales revenue of production, which results from a certain amount of employment, is referred to as the "total supply price" of this production. In other words, these are the minimum expected earnings that are seen as only necessary to induce entrepreneurs to provide a certain amount of jobs. For the whole economy at a certain level of employment, the total offer price is the total amount (sales revenue) that all producers together have to expect from the sale of the production produced by that particular number of men, if it is only to be worthwhile to employ.
A schedule of the minimum earnings required to induce entrepreneurs to give different amounts of employment is called a comprehensive pension plan. This is also an increasing function of the amount employed. In other words, the minimum sales revenue requirement continues to rise as employment and output rise. This is due to the increase in production costs with increasing production, since capital, production techniques and organization are taken into account in the short term. It should be noted here that the total demand function is the expected sales revenue that we take into account, and the total supply function is the required minimum sales revenue. There will be a difference between them as at certain levels of employment (outputs) the producers expect more income than the minimum sales revenue required. There will be other levels of employment where the expected sales proceeds may be less than the required sales proceeds.
UNIT III
Question Bank
Q1) Explain the term Wages.
Ans . The term "wages" is defined as the sum of money paid by the employer under the contract to the worker for the rendered services. Wage payment is essentially the price paid for a particular commodity, IE., Labor service. According to the classical theory of wages, labor supply was considered a function of real wages. But according to Keynes, workers irrationally and generally negotiated for money wages, and they reacted sharply against the reduction of money wages. Monetary wages are also called nominal wages. But money wages alone may not give the right idea of what workers really earn; it will determine the standard of living of workers.
Q2) What are the factors that determine the theory of wages?
Ans. The factors that determine the real wage or standard of living of workers are:
(a) The purchasing power of money: the purchasing power of money is used to compare wages in different places and at different times. It is reversed by the price level, that is, the higher the price, the lower the purchasing power and vice versa. Part of the high wages in the UK and North America may be due to the prevailing price increases in those countries/regions.
(b) Subsidiary income: Subsidiary income is the income that an employee has in the form of money or goods, in addition to normal money wages. For example, free boards and accommodation are provided to household servants and peons, professors who earn additional income by marking exam papers, etc.
(c) Extra work without extra pay: If an employee needs to do extra work without compensation, his real wage will be reduced to that extent.
(d) Regularity or irregularity of employment: Regular or safer employment may be given a wage of money, but its actual income may be given a wage of higher money.
(e) Conditions of work: Some professions are healthier than others, and some work hours are shorter than others. All these things are taken into account in the assessment of real wages.
(f) Future prospects: if there is a good prospect of rising in the future, a low money income is considered a high real wage.
Q3) Define Subsistence theory.
Ans. This theory originated from the Physics School of French economists and was developed by Adam Smith and later economists of the classical school. The German economist Lassar used to call it the Iron Law of wages or the brazen law of wages. Karl Marx made it the basis of his theory of exploitation.
According to this theory, wages tend to settle at a level sufficient to keep workers and their families at a subsistence level. When wages exceed the self-sufficiency level, workers are encouraged to marry and have large families. The mass supply of Labor reduces wages to the level of self-sufficiency. If wages fall below this level, marriage and childbirth will be discouraged, and lack of nutrition will increase mortality. Eventually, the labor supply will decrease until wages rise again to the self-sufficiency level. It is believed that the supply of Labor is infinitely elastic, that is, as the price offered (that is, wages) increases, its supply increases.
Q4) What are the Criticism of subsistence theory?
Ans. Criticism of above theory:
This theory is almost completely obsolete, and there is no such practical application, especially in developed countries. This theory was based on the Malthus theory of the population. It would be inappropriate to say that with each increase in wages, the rise in the birth rate must necessarily continue. Higher living standards may follow, followed by higher wages.
- Ricardo was one of the indices of subsistence theory. He emphasized the influence of habits and habits in determining what workers need. But habits and habits change over time. Therefore, the theory cannot hold good for a longer period, especially in a world characterized by rapidly changing habits. Therefore, Ricardo acknowledged that in an improving society, wages could exceed the self-sufficiency level indefinitely.
- The second criticism of this theory is that the self-sufficiency level is more or less uniform for all working classes, with certain exceptions. Therefore, theory does not explain the difference in wages in different jobs.
- The third criticism is that this theory explains wages only with reference to supply, and the demand side is completely ignored. On the demand side, the employer must take into account the amount of work that the employee gives, not the self-sufficiency of the worker.
- The fourth criticism is that the theory does not account for wage adjustments over the lifetime of generations and for wage fluctuations from year to year.
- The fifth and final criticism is that the term "subsistence" has a very vague impression. Does it refer to the minimum requirements of modern man or tribal Barbarians?
Q5) Explain the criticisms of marginal productivity theory
Ans. Criticisms of marginal productivity theory:
This theory is true only under certain assumptions such as perfect competition, complete mobility of Labor, homogeneous character of all labor, constant interest and rent, given price of products, etc. It's a static theory. The real world is dynamic. All assumptions are unrealistic. Criticism of this theory is as follows:
- According to this theory, labor is fully mobile and can move from one employment to another, but this is not true in the real world.
- According to this theory, there is a uniform wage rate throughout the market, which is impossible. Workers with the same skills and efficiency cannot receive the same pay in two different locations.
- In the case of monophony, i.e., one buyer and many sellers, the employer has a grip on wages and can pull down wages below the value of the marginal net product of Labor. If the employees are collectively organized, then the wage rate can be negotiated. Thus, wages are determined not only by the number of employed workers, but also by the relative bargaining power of the Union and the employer.
- Another assumption of this theory is that there is a perfect competitive market existence for the product, which is also an unrealistic assumption. In the real world, the market of goods is characterized by incomplete competition. This also destabilizes the theory.
- It should be noted that the marginal net product of Labor depends not only on the supply of labor, but also on the supply of all other production factors. If other factors are abundant and labor is relatively small, then the marginal product of Labor is higher, and vice versa.
- This theory regards the supply of labor as the norm. Productivity is also a function of wages. Low productivity can be a source of low wages that can signal workers ' efficiency, lower living standards and ultimately check the supply of Labor.
Q6)What are the factors that determine demand for labor?
Ans. The factors that determine the demand for labor are:
a) Derivative demand: demand for Labor is derivative demand. It is derived from the demand for goods that it helps to produce. The greater the consumer demands for the product, the greater the producer's demand for the labor required to produce the goods. It may be observed that it is the expected demand, and not the existing demand for the product that determines the demand for Labor. Therefore, the expected increase in demand for products will increase the demand for Labor.
b) Elasticity of labor demand: the elasticity of labor demand depends on the elasticity of commodity demand. According to this theory, if wages are formed only a small percentage of total wages, then the demand for labor become generally inelastic. On the other hand, if the demand for the product is also elastic, or if cheaper alternatives are available, then the demand will be elastic.
c) Price & quantity of cooperating factors: the demand for Labor also depends on the price and quantity of cooperating factors. If the machine is expensive, then the demand for Labor will increase. The greater the demand for cooperative factors, the greater the demand for labor, and vice versa
d) Technical progress: Another factor affecting labor demand is technological progress. In some cases Labor and machineries are used in clear proportion
Q7) Mention the three destinations of Labor.
Ans. Labor can supply three destinations:
- Labor supply to enterprises: For a particular enterprise, at the current wage rate, the labor supply is completely elastic because it can engage as many workers as you want. Its own demand is only a very small part of the total supply of Labor. Thus, the labor supply curve of the enterprise is a vertical straight line.
2. Labor supply to industry: For the industry as a whole, the supply of Labor is not infinitely elastic. If the industry wants more labor, it will attract the industry by providing high wages. Labor supply to industry is subject to the supply law, that is, the supply law. The supply varies directly with the price, which means a small supply of low wages and a large supply of high wages. Thus, the supply curve of labor for industry is tilted upward from left to right.
3. Labor supply to the economy: The supply of labor for the entire economy depends on economic, social and political factors or institutional factors, for example, the attitude of women to work, the working age, the age of school or university and the possibility of part-time employment for students, the size and composition of the population and gender distribution, the attitude to marriage, the size of the family, contraception, etc. Over a short period of time, the reduction in wages may not cause any decrease in the supply of Labor. But if wages are too low, competition among employers themselves will push them up. Even over a long period of time, the supply of Labor is not very elastic. A certain minimum wage, where Labor does not work at all, is below. If this minimum is exceeded, the supply of labor increases as the wage rate increases. But this only happens to the point when the increase in wages leads to a decrease in the supply of Labor. Again, after the point, this trend will be reversed if we consider that workers can move on to a higher level of life. Thus, an increase in wages can lead to an increase or decrease in the supply of Labor. It depends on the relative assessment of the goods and leisure of the worker.
Q8) Define Wages under incomplete competition.
Ans. Wages under incomplete competition:
Incomplete competition may arise:
(A) Bilateral monopoly: When strong employer associations are faced with strong labor organizations.
(b) Monophony: when an industrial employer or a group of employers occupies a very strong monopoly position in comparison with Labor.
(a) Bilateral monopoly: the term “bilateral monopoly “applies to both goods and labor. This applies to situations where the monopoly of purchases coincides with the monopoly of sales, that is, a single monopoly facing a single monopolist. Monopolies want to operate on a scale where marginal costs are equal to marginal revenues. Monopolists, on the other hand, want to buy an amount whose marginal cost is equal to marginal utility. This indicates the best price for the buyer and the best price for the seller. There is no economic principle for determining equilibrium prices.
(b) Monophony: whereas Labor occupies a very weak position in comparison, this is the most common situation of incomplete competition in which the employer embodies the concentrated monopoly power of being the sole purchaser of labor in his person. Monophony also wants to ensure that big employers are in a position to influence wages
Q9) How are labor exploited?
Ans. There are three types of labor exploitation:
(a) Monophonic exploitation: where a single employer has the strongest impact on wage rates.
(b) Exclusive exploitation: in this state, there is complete competition in the labor market, but incomplete competition in the product market. In equilibrium, the company equates wages with marginal revenue products. This means that Labor is paid less than the value of marginal products, which indicate exploitation.
(c) Double exploitation: occurs when there is incomplete competition in both the labor market (monophony) and the product market (monopoly). Thus, there is a double exploitation of unitary and monopolistic labor, in which Labor is most exploited.
Q10) Explain the causes of differences in wages in different jobs, professions and regions.
Ans. The causes of differences in wages in different jobs, professions and regions are as follows:
- Difference in efficiency: that is, the difference in the conditions under which education, training and work are performed
B. The presence of non-competing groups: these groups arise due to difficulties in the way of the movement of labor We can see that this wage, or NH, is less than the marginal income productivity, which is NE. So each worker gets EH less than this marginal income product. This is a measure of labor exploitation under monophony. This is called"monopsonic exploitation “by Mrs Robinson. Thus, under monophony, wages are lower, and employment is less than under full competition in the labor market. Under perfect competition, the equilibrium would have been C where the supply curve AW cuts the demand curve MRP. At this point, wages would have been higher in OW'(=N'C) and the labour employed would have been greater in ON’. From low-wage to high-wage employments. Following are the reasons:
C. Difficulty in learning Trade: few people can master difficult trade. Their supply is less than their demand, and their wages are higher.
D. Differences in comfort or social respect: disgusting employment must pay higher wages to attract workers. If a disgusting job is done by unskilled workers who cannot do anything better, wages can be quite low, for example, a sweeper.
E. future prospects: if a profession provides an opportunity for future promotion, people will accept a low star in it, as well as another profession offering a higher initial reward, but will not be able to do so.、
F. Dangerous and dangerous occupation: generally offers higher emoluments.
G. Regularity or irregularity of employment: it also has a strong effect on the level of wages.
H. Collective Bargaining: differences in the strength and militancy of trade unions also explain differences in wages in different industries.
Q11)Summarize the theory of Interest and Employment.
Ans. This theory can be summarized in the following proposition:
(1) In a given situation of technology, resources and costs, income (both monetary and real income) depends on the amount of Employment N.
(2) the relationship between the income of the community and what can be expected to be spent on the consumption specified by D1 depends on the psychological characteristics of the community, which is to say, consumption depends on the level of gross income, and therefore on the level of Employment N, unless there is some change in the consumption trend.
(3) The amount of labor that an entrepreneur decides to hire N depends on the sum of D1, which is the amount that the community is expected to spend on consumption, and D2, which is the amount that it is expected to spend on new investments. D is what we called above effective demand.
(4) D1+D2=D=σ(N), where σ is the aggregate supply function, and as seen in(2)above, D1 is a function of n, and we can write σ(N) depending on the consumption trend, so σ(N)-σ(N)=D2.
(5)thus, the amount of employment in equilibrium depends on(i)the total supply function σ, (ii)the consumption trend σ, and(iii) the amount D2 of investment.
(6) For all values of n, there is the corresponding marginal productivity of labor in the wage property business, and it is this that determines the real wage. Thus, (5) is subject to the condition that n cannot exceed the value that reduces real wages equally to the marginal disadvantage of Labor. This means that all changes in d are incompatible with the temporary assumption that money-wages are constant. Thus, eliminating this assumption is essential for the full statement of our theory.
(7)in the classical theory, if D=σ(N) for all values of N, then the amount of employment is in a neutral equilibrium that is less than its maximum for all values of n, and the force of competition among entrepreneurs is expected to push it to this maximum. Only at this point, in the classical theory, a stable equilibrium can exist.
8. The key to our practical problems is in this psychological law. From this we can conclude that the larger the amount of employment, the gap between the total supply price (Z) of the corresponding output and the sum (D1) that entrepreneurs can expect to recoup from consumer spending.
Q12) Write short note on Principle of Effective Demand.
Ans. Principle of Effective Demand: Before Keynes, no satisfactory explanation was given of the factors determining the level of employment in the economy. Economists mostly assumed the prevalence of the state of full employment by believing in Say's law of markets, an old proposition that states that all income is spent automatically or that the level of effective demand is always sufficient to lift all goods and services, products from the market.
There were many economists who challenged the assumptions and logic of Say's Law. For example, T.R. Malthus endeavored to convince contemporaries that demand in general may not match supply in general and the shortage of aggregate demand could cause general overproduction and thus general unemployment. But Malthus failed to explain how actual demand could be lacking or excessive. It was Keynes who for the first time proposed a systematic and convincing theory of employment based on the "Principle of Effective Demand". The idea behind this theory is not difficult to grasp.
Q13) Define Keynes’s Principle of Effective Demand.
Ans. Keynes’s Principle of Effective Demand:
The principle of "effective demand" underlies Keynes's analysis of income, production and employment. Economic theory was radically changed with the introduction of this principle. In short, the effective demand principle tells us that in the short run, an economy's aggregate income and employment are determined by the level of aggregate demand that is satisfied by aggregate supply. Total employment depends on total demand. As employment increases, income increases. A fundamental principle of the propensity to consume is that as the real income of the community increases, consumption will also increase but less than income.
Therefore, to have enough demand to support an increase in employment, there must be an increase in real investment equal to the gap between income and consumption of that income. In other words, employment can only increase if investment increases. We can generalize and say; a certain level of income and employment can only be maintained if the investment is sufficient to absorb the savings of that level of income. This is the heart of the principle of effective demand
Q14) What is the Importance of the Concept of Effective Demand?
Ans. The principle of effective demand is an integral part of Keynesian employment theory. The general theory has the basic observation that aggregate demand determines total employment. A lack of effective demand leads to unemployment. The principle of effective demand is important in the following points. First, it can be said that with the help of the concept of effective demand, Say's market law was rejected. The concept of effective demand has shown beyond any doubt that whatever is produced is not automatically consumed and income is not spent in such a way that the factors of production are fully used. Second, an analysis of effective demand also reveals the inherent contradictions in Pigou's plea that wage cuts will eliminate unemployment. Keynes believes that wage cuts may or may not increase employment as the level of employment depends on the level of real demand.
Third, the effective demand principle could explain how and why depression might persist. Keynes explained that effective demand is consumption and investment. As employment increases, so does income, leading to an increase in consumption, but by less than the increase in income. Thus, consumption lags and becomes the main reason for the gap that exists between total income and total expenditure in order to maintain effective demand at an earlier (or original) level, namely a real investment that corresponds to the gap between income and consumption, it has to be done. In other words, employment can only grow if investment increases. Here the principle of effective demand has the greatest importance. It makes it clear that investments rule the quarter. Fourth, the demand side is moving into the spotlight. In contrast to the classic emphasis on the supply side, Keynes placed great emphasis on the demand side and attributed fluctuations in employment to changes in demand. Effective demand theory illustrates how and why aggregate demand becomes deficient in a capitalist economy, and how a lack of effective demand leads to depression.
Q15) How can you explain Determinants of Effective Demand?
Ans. To understand Keynes' employment theory and how employment equilibrium arises in the economy, we need to understand the determinants of the aggregate demand function and the aggregate supply function and their interrelationships.
- Aggregate Demand Function and
- Aggregate Supply Function.
1. Aggregate Demand Function: The aggregated demand function relates each employment level to the expected revenue from the sale of production from this employment volume. How high the expected sales revenue will be depends on people's expected spending on consumption and investment. Every producer in a free enterprise economy tries to estimate the demand for his product and calculate in advance the profit that will likely be made from his sales proceeds. The total sum of the income payments to the production factors in the production process forms its factor costs. The factor cost and the entrepreneur's profit thus give us the total income or the proceeds that result from a certain amount of employment in a company. Keynes brought this idea into macroeconomics. We can calculate total income or total sales revenue. This total income, or the total revenue expected from a given amount of employment, is called the "total demand price" of the production of that amount of employment; H. It represents expected revenue when employees are offered a certain volume of employment.
Entrepreneurs make decisions about the amount of employment they offer the job based on sales expectations and expected profit, which in turn depend on an estimate of the total money (income) they will get from selling goods that are manufactured at different levels of employment. The sales revenue they expect is the same as what they expect from the community for their production.
2. Aggregate Supply Function:
The total offer relates to the production of companies. Entrepreneurs, in providing jobs for workers, need to be sure that the output they produce is sold out and that they are able to meet their production costs and also achieve the expected profit margin. A company's production can be sold at different prices depending on market conditions. However, there is some income from the output for which the entrepreneurs feel that it is only worthwhile to provide a certain amount of jobs. The expected minimum sales revenue of production, which results from a certain amount of employment, is referred to as the "total supply price" of this production. In other words, these are the minimum expected earnings that are seen as only necessary to induce entrepreneurs to provide a certain amount of jobs. For the whole economy at a certain level of employment, the total offer price is the total amount (sales revenue) that all producers together have to expect from the sale of the production produced by that particular number of men, if it is only to be worthwhile to employ.
A schedule of the minimum earnings required to induce entrepreneurs to give different amounts of employment is called a comprehensive pension plan. This is also an increasing function of the amount employed. In other words, the minimum sales revenue requirement continues to rise as employment and output rise. This is due to the increase in production costs with increasing production, since capital, production techniques and organization are taken into account in the short term. It should be noted here that the total demand function is the expected sales revenue that we take into account, and the total supply function is the required minimum sales revenue. There will be a difference between them as at certain levels of employment (outputs) the producers expect more income than the minimum sales revenue required. There will be other levels of employment where the expected sales proceeds may be less than the required sales proceeds.
