Economics- Wage Rage - Economics Profit - Assessment Answer

December 26, 2018
Author : Ashley Simons

Solution Code: 1ABCD


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There are four types of market structures namely perfect competition, monopolistic competition, oligopoly and monopoly. Perfect competition and monopoly are two extreme forms of market structures where product differentiation is not necessary. In perfect competition there are larger number of players and sellers selling homogeneous products and hence there is no differentiation. Similarly in monopoly there is a single seller selling this product in the market and hence very soon need for differentiating this product from its competitors (as there are no competitors for the monopolist). In the case of oligopoly or monopolistic competition the firms in the industry do not sell homogenous products, but they sell differentiated products which are close substitutes to each other and hence increase in a quality of one brand can increase its demand through building brand loyalty among its customers. This results in higher market share for the firms in oligopoly and monopolistically competitive industry, as this non-price competition among firms might result in building brand loyalty among their customers and this results in higher profits for the differentiating firms in the short run. However the reaction of the rival firms in oligopoly and the entry of new firms in the monopolistically competitive industry does not guarantee economic profits in the long run. This is being analysed here.


In the case of perfect competition or monopoly there is no need for product differentiation whereas in oligopoly and more monopolistically competitive industry firms differentiate their products from the close substitutes in order to in more market share, profits from the product differentiation strategies(Shaked and Sutton, 1982). In the case of oligopoly the firms in the industry can advertise or build brand loyalty in order to increase their market share and this results in super normal profits both in the short run and in the long run according to the competitive strategies of their rivals. This is often referred to as games played by competing firms in the oligopoly industry. In the case of monopolistic competitive firms, firms can differentiate from the close substitutes through advertising or brand building strategies which can result in quality differentiation, and this results in super normal profits earned by the firms in the short run. In the long run however the firms might not earn the economic profits, as new firms will enter the market attracted by these super normal profits earned in the short run.

We will discuss the case of the monopolistically company firms which differentiates its products from its rivals and hence as a steeper demand curve as shown in the following figure. When the firm differentiates the demand curve for the product is steeper than that of its rivals (Just as a monopolist). The firm can differentiate its product by having a celebrity to advertise its product (or to be more precise hiring a cricketer to advertise for a health drink). This would result in more demand for the product as consumers associate this celebrity or cricketer with that product and hence the demand will be more. Its brand building and loyalty will keep their customers to stick their demand to that particular product which will result in more profits in the short run(Ottaviano and Thisse, 2011).

In the case of long run the competing firms may also through the same strategy and hence the demand curve will become more flat resulting in the zero economic profits for the firms in the monopolistically competitive industry.


In the above figure, the differentiating firm has a steeper demand curve AR as shown, and the MR curve. Equilibrium happens where MC cuts MR from below and this is at 0Q quantity and OP price. Here the firm is earning OP as the price per unit and OS as the cost per unit. Hence the total profit earned by the firm is the shaded area PRST in the above figure. However in the long run, two things might happen(Boumal and Blinder, 2012). Either new firms will enter the market with similar strategies and this will wipe the super normal profits earned in the short run; Or the competing firms may also through the same strategy and hence the demand curve will become more flat resulting in the zero economic profits for the firms in the monopolistically competitive industry. This is shown in the following figure.

monopolistically competitive industr

The long run price is at P and Q is sold by the firm in the market. In the long run, the demand curve of the firm has become flatter resulting in zero economic profits for the firm. This long run analysis of differentiation by monopolistic competitive firms suggests one more implication. In order to earn economic profits in the next period, and respond to new firms entering with close substitutes, firms will be continuously innovating. Only by continuous innovation will they be able to generate economic profits in the short run and this will make them stand out in the crowd of competitive rivals and for this reason competition is seen as a good thing in industries as it encourages innovation among firms and for this same reason, monopolist does not have any incentive to innovate, as there is no competition(Layton and Robinson, 2012).


Advertising is the art of persuading customers to make them believe that the products are different from its close substitutes. The firms can either make the products really different from that of its rivals or it can use the tool of advertising to persuade consumers into that belief that the product is different. From the above analysis, we can conclude that product differentiation enables firms to stand out in the crowd and earn more profits for a period of time after which this effect wears out. Firms have to continuously innovate in order to earn profits in the long term (or at different short periods). The competition in the industry and the differentiated products of the firms help the consumers to have a variety of choices between close substitutes and chose the best among them.



If we take the labour market in general, the demand for and the supply of labour determines the wage rate as shown in the next section. A wage differential between the various workers across industry might occur due to differences in their ability and effort while performing their duties at the workplace. The wage differences between organisations and across industries might be due to the differences in the demand for and the supply of particular kind of labourers who differ in their skill sets, education, experience et cetera that might be the reason for their wage differentials between the particular industry. In this question, we will analyse the reasons for the wage differentials between the various individuals across industries and occupations and also within the same industry and occupation. The demand for labour is derived demand from the product or service if the labour works and else in producing. If the demand for such labour is very high, then the labourers in that job earn a higher wage than the others. The wage of the labourer is also determined by the supply of these labourers. When the supply of laborers who are unskilled is very high, the wage rate is very low, as there is a excess supply of such labour in the industry.



In the above figure, the demand for labour is represented by the red line and supply of labour is denoted by the green line. The two intersect each other at wage rate W and here the quantity of labour demanded and supplied is equal at Ql. Above this wage rate, there is a excess of labour supply than it is demanded and below this wage rate there is a shortage of labour in the labour market. However there are differences in each of the labour market as there are differences in the various job profiles. Apart from these, government regulation regarding the minimum wage can make the labour market out of equilibrium. If the minimum wage is higher than the equilibrium wage rate then there would be excess supply of labour. And if the wage rate is lower than the equilibrium wage rate, then there would be shortage of labour in the industry(Robinson, 2009).

Certain job profiles pay more than others. For example surgeons or doctors at the hospitals make more salary than the teachers teaching at schools or colleges. There may be differences in salaries paid to salespeople. Their wage differentials between the various job profiles or occupations result from the various job profiles that require Ypres having various educational backgrounds and training requirements. There are human capital differences between these various occupations. The surgeons require more intense education in their field than the salespeople who can earn from a part-time job when they are still at high school. The ability of the people to perform the job and the job differences can result in the wage differentials. When the job requirements are hazardous or dirty or even seasonal these jobs may result in more pay as they are less desirable by the labourers. This is often referred to as compensating differentials. The various factors that result in wage differentials occur to the differences in the job requirements. When the job requires risk taking work or work in poor conditions, this might result in the higher wage rates than other works. Wage differentials can also occur dut to the opportunity costs of human capital that is foregone during the education of graduate and post-graduation of the youngsters. Youngsters who have a MBA command more salary or pay than others in the executive jobs. This in general is referred to as a reward for human capital as they take upon leadership roles in the organisations. Wage differentials can occur due to differences in the skill sets. This is because of the fact that market demand for skilled labourers is more than the unskilled labourers which pushes the wage rates. As the skilled labourers have inelastic supply and when the demand for skilled labourers goes up, this pushes up the wage rate for skilled labourers. Economics can explain some portion of the differences in the wages.

The differences in the productivity of labourers and their revenue creating ability also result in wage differences. When the efficiency of the workers is highest, their rewards in the form of pay or salary are also higher as explained by the law of diminishing marginal productivity(Miller, 2012). Generally professionals claim higher salaries and bonuses based on their performance. The effect of trade unions and their bargaining power can also have the power of influencing the wages to bring about a mark-up and higher wages for their members(Stewart, 2009). Over the years, there has also been employer discrimination among various castes, race, religion, sex for the differences in their wages(Oaxaca, 1973). Though there is much legislation in place, this has not reduced the wage differences between various sections of the society, due to employer discrimination.

The wage differentials can also happen due to elasticity of demand and supply of labour which is explained using the figure below.

 elasticity of demand and supply


Skilled workers have inelastic supply and are difficult to be replaced with capital machinery and hence they have higher wages, whereas unskilled workers are more abundant in the labour market and hence this results in lower wages as they require less training for their job requirements.


From the above analysis, it can be seen that wage differentials occur due to various reasons like the demand and supply of skilled and unskilled labourers. Similarly the elasticity of demand and supply of labour also affect their wages. The minimum wage legislation can also interfere in the wage and labour market equilibrium. The collective bargaining powers of the trade unions also result in higher wages for the union members. Some professions of high esteem also command higher salaries like doctors and lawyers. Wage differentials might also occur due to positive discrimination or negative discrimination against some labour groups like ethnicity, gender or age. This results in labour market failures.

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