Cambridge International as and a level Economics Ebook

earnings: 
This is the minimum payment 
necessary to keep labour in its present use.
2 Economic 
rent: 
Any payment to labour which is over and 
above transfer earnings.
Transfer earnings: 
the amount that is earned by a factor of 
production in its best alternative use.
Economic rent: 
a payment made to a factor of production 
above that which is necessary to keep it in its current use.
KEY TERMS
Both are shown in
 Figure 8.17a.
Transfer earnings are 
indicated by the area under the labour supply curve. 
As we have seen, this is upward sloping. Although the 
equilibrium wage is 
W
, at wage rates below this there 
are workers who are willing to off er their services to 
employers. In fact, at any wage rate from zero upwards, 
workers will join the labour market, until at wage 
W
, 
L
(labour supply) is available. In all cases up to 
W
, the wage 
that a worker receives is their best alternative. For those 
workers willing to work for less than 
W
, then any wages 
they get over and above what they will accept is their 
economic rent. Th
is is shown by the triangular area in 
Figure 8.17a.
It follows, therefore, that diff erent workers receive 
diff erent amounts of transfer earnings and economic rent 
even in the same job. Take a bus driver as an example. 
Some people are very willing to drive buses for a low wage. 
Th
ese have low transfer earnings and some economic rent. 
Others, however, will be attracted just by the equilibrium 
wage paid to bus drivers. In such cases they have little or 
no economic rent, the wage almost entirely consisting of 
transfer payments.
Th
e case of superstars can be explained using 
Figure 8.17b.
 Such people have a scarce and, in some 
respects, unique talent. Th
eir labour supply curve is 
completely inelastic and their earnings consist entirely 
of economic rent. In contrast, workers who have a 
completely elastic supply, such as many unskilled 
workers and others in menial jobs, have no economic 
rent at all as their earnings consist entirely of transfer 
earnings. Employers can hire an infi nite supply of 
labour at the market wage, 
W
. Th
is situation is shown in 
Figure 8.17c.
W
2
W
1
Quantity of labour
0
W
age 
D
2
Supply
L
2
Incr
ease in wages
D
1
Increase in 
demand for labour
L
1
Increase in employment
Figure 8.15 
Eff ects of an increase in demand for labour
W
1
W
2
Quantity of labour
0
W
age
Demand
S
1
L
2
Fall in wages
Increase in 
labour supply
L
1
Increase in employment
S
2