Edexcel AS/A Level Economics revision

Market failure  A recap on markets For a good in a competitive market:  Demand is derived from willingness to pay, and so the demand curve slopes downwards as  people are willing to buy more as prices decrease.  Supply is derived from firms' costs, so the supply curve slopes upwards as firms endeavour to make more money.  Supply and demand are brought together in a market , where agents exchange goods (and money).  A market equilibrium (price and quantity at equilibrium), exists where supply and demand meet and no agent has an incentive to offer more or less units at a higher or lower price.  In a perfectly competitive market, all agents are price takers,  meaning they have no ability to change the market price as each supplier and consumer is small relative to the overall size of the market.  The market equilibrium is allocatively ' Pareto  efficient', meaning that no-one can be mad...

Wage determination  As you can see above, wages are determined in an industry as prices are - by taking where the supply and demand curve meet, the point of equilibrium. The area below  W e  and to the left of the supply curve is the area of labour surplus. The area above  W e  and to the left of the demand curve is the employer surplus.  Labour surplus is the workers that would have been willing to work at a lower wage than  W e  so are benefitting. It is the difference between the wage  workers would have been willing to accept and what they are actually accepting.  NB: this is NOT the same as surplus labour.  Employer surplus is the difference between what firms are willing to pay workers and what they actually are paying. It is the firms that would have been willing to pay workers a higher wage than  W e. The firms that are to the right of Q e  are those who are not working because they h...