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Q4
Some workers producing non-essential luxury goods or services are paid very highly. The wage rate is not the economic value of a good or service, but more to social factors or fashion. The economic theory of wages is, therefore, of little use in explaining wage differentials. Assess this argument.
Intro: Labor market supply and demand, wage determination, wage differentials general, ECONOMIC THEORY OF WAGES
P1: production of luxury goods vs. other normal/inferior/Giffen/Veblen goods. Demand for this good influenced by fashion and social factors (not necessity/ income as for the other goods) help determine what might be charged for product
P2: how demand for a good can impact the demand and supply of labor
This is because if an extra worker adds more to the firm’s revenue than to the costs, the firm’s profits will increase. Marginal revenue product refers to the amount of revenue generated by the worker and marginal cost will soon become the labor’s wage. Even more, it can therefore be deduced that the firm should hire workers up to the point where the value of the marginal product of labor equals the wage being paid; this refers to the change in output produced by the labor, as shown on the third diagram. However, as more and more workers are employed, diminishing returns may set in, and employment will no longer bring profits to the firm. If represented on the second diagram, diminishing returns would set in at the top of the MRP curve. It is important to differentiate between the market structures as the economic theory of wages is applied differently in perfect markets than in imperfect markets. For the case of perfect labor markets, the assumption is that everyone is a wage taker, and there is no power of employers or employees. Moreover, there is also a freedom of entry, so workers can move from one job to another; there is perfect knowledge where workers are fully aware of all jobs available. As such wage rate and employment is determined by the interaction of market demand and supply of labor, which are different for firms than for an industry as shown in the fourth diagram. Because labor is