ECON111 Microeconomic Principles Study Material

This study material covers topics such as wage equilibrium, surplus, and minimum wage impacts in ECON111 Microeconomic Principles. It includes calculations, diagrams, and analysis of the impacts of minimum wage on firms, workers, and society. The JSON output provides a title, meta title, meta description, summary, and relevant course information.

Running head: ECON111 MICROECONOMIC PRINCIPLES
ECON111 Microeconomic Principles
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ECON111 MICROECONOMIC PRINCIPLES
Table of Contents
Answer 1....................................................................................................................................3
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................3
Answer 4....................................................................................................................................4
Part 4i)....................................................................................................................................5
Part 4ii)...................................................................................................................................5
Part 4iii)..................................................................................................................................5
Answer 5....................................................................................................................................6
Part 5i)....................................................................................................................................6
Part 5ii)...................................................................................................................................6
Answer 6....................................................................................................................................6
Part 6i)....................................................................................................................................7
Part 6ii)...................................................................................................................................7
Part 6iii)..................................................................................................................................7
Part 6iv)..................................................................................................................................8
Part 6v)..................................................................................................................................8
Answer 7....................................................................................................................................8
Part 7i)....................................................................................................................................8
Part 7ii)...................................................................................................................................9
Part 7iii)..................................................................................................................................9

ECON111 MICROECONOMIC PRINCIPLES
Answer 8....................................................................................................................................9
Part 8i)....................................................................................................................................9
Part 8ii)...................................................................................................................................9
Part 8iii)................................................................................................................................10
Part 8iv)................................................................................................................................10
Answer 9..................................................................................................................................10
Answer 10................................................................................................................................10
Answer 11................................................................................................................................11
Answer 12................................................................................................................................11
References................................................................................................................................12

ECON111 MICROECONOMIC PRINCIPLES
Answer 1
A minimum wage is the lowest amount of payment that the employer needs to pay to the
employee (i.e. the wage earners) for a set period of time which cannot further reduced by an
set of contract or agreement (Jardim et al. 2017). Binding minimum wage is set above the
wage equilibrium level where the firms are forced to pay and are not willing to hire at this
particular wage.
Answer 2
As per Australia’s national workplace relations tribunal (“Fair Work Commission”), the
minimum wage rate for an adult is $18.93 per hour and if calculated based on a week of 38
hours, then it would be $719.20 per week (FWC 2018).
Answer 3
To calculate equilibrium wage rate, labour demand and labour supply should be equal for
hours of labour.
Here, Labour demand = Labour supply
1,500,000 – 60,000W = 120,000W – 1,200,000
 120,000W + 60,000W = 1,500,000 + 1,200,000
180,000 = 2,700,000
W = 2,700,000/180,000 = 15
Unskilled labour at the existing wage rate can be given as
=1,500,000 – 60,000W
= 1,500,000 – 60,000 * 15
= 1,500,000 – 900,000

Labour demand
Labour supply
Eq
W* = 15
600,000
Wage rate
per hour
Hours of labour
Labour demand
Labour supply
Eq
W* = 15
600,000
Wage rate
per hour
Hours of labour
W2=10
CS = 3,000,000
PS = 1,500,000
W1=25
ECON111 MICROECONOMIC PRINCIPLES
= 600,000
Hence, equilibrium wage rate = $15 with 600,000 as quantity of unskilled labourers
Diagrammatically, it can be presented as given below.
Answer 4

ECON111 MICROECONOMIC PRINCIPLES
D = 1,500,000 – 60,000W
The maximum a firm is prepared to pay to its workers is given by W1
W1 = 1,500,000/ 60,000 = 25
S = 120,000W – 1,200,000
The minimum a firm is supposed to pay as cost for labour is given by W2
W2 = 1,200,000/ 120,000 = 10
Part 4i)
Consumer Surplus or Firm’s Surplus = ½ * base * height
 Consumer Surplus = ½ * 600,000 * (25-15)
 Consumer Surplus = ½ * 600,000 * 10
Consumer Surplus or Firm’s Surplus = ½ * 6,000,000 = 3,000,000
Part 4ii)
Producer Surplus or worker’s Surplus = ½ * base * height
 Producer Surplus = ½ * 600,000 * (15-10)
 Producer Surplus = ½ * 600,000 * 5
 Producer Surplus or Worker’s Surplus = ½ * 3,000,000 = 1,500,000
Part 4iii)
Total Surplus = Firm’s Surplus + Worker’s Surplus
 Total Surplus = 3,000,000 + 1,500,000
Total Surplus = 4,500,000

Labour demand
Labour supply
Eq
W* =
15
600,000
Wage rate per
hour
Hours of labour
W1=25
W2 = 10
Excess Labour supply
A=CS
360,000 1,080,000
Min wage= 19
B=PS1
C=PS2
E=DWL1
D=DWL
2
F=RC
G
ECON111 MICROECONOMIC PRINCIPLES
Answer 5
Part 5i)
When the FWC puts forward a minimum wage of $19, the hours of labour exchanged in the
market can be given as
Hours of Labour demand = 1,500,000 – 60,000W = 1,500,000 – 60,000 * 19 = 1,500,000 –
1,140,000 = 360,000
Hours of Labour Supply = 120,000W – 1,200,000 = 120,000 * 19 – 1,200,000 = 2,280,000
– 1,200,000 = 1,080,000
Part 5ii)
At $19, minimum wage, hours of supply labour exceeds demand.
The difference of Hours of Labour Supply – Hours of Labour demand = 1,080,000 –
360,000 = 720,000
Answer 6
Calculation when minimum wage = $19

ECON111 MICROECONOMIC PRINCIPLES
Part 6i)
Consumer surplus = A = ½ * base * height
 Consumer Surplus = ½ * 360,000 * (25 - 19)
 Consumer Surplus = ½ * 600,000 * 6
Consumer Surplus or Firm’s Surplus = A = ½ * 3,600,000 = 1,080,000
Part 6ii)
Producer Surplus or worker’s Surplus = B + C
 B = length* breadth
 B = 360,000 * (19 - 15) = 360,000 * 4
 B = 1,440,000
C = {(C + D) – D}
C = {( ½ * 600,000 * (15 - 10)) – ( ½ * (600,000- 360,000) * (15 - 13))}
C = ( ½ * 600,000 * 5) – ( ½ * 240,000 * 2)
C = (½ * 3,000,000) – (1* 240,000)
C = 1,500,000 – 240,000
C = 1,260,000
Producer Surplus or worker’s Surplus = B + C = 1,440,000 + 1,260,000 = 2,700,000
Part 6iii)
Total Surplus = Firm’s Surplus + Worker’s Surplus
 Total Surplus = 1,080,000 + 2,700,000

ECON111 MICROECONOMIC PRINCIPLES
Total Surplus = 3,780,000
Part 6iv)
F = Resource Cost
Resource Cost = (E + F + G) – E – G
E + F + G= Length * breadth
E + F + G = (1,080,000- 360,000) * (19 - 15) = (720,000 * 4) = 2,880,000
E = ½ * base * height
E = 0.5* (600,000 - 360,000) * (19 - 15) = ( ½ * 240,000 * 4) = 480,000
G = ½ * base * height
G = 0.5* (1,080,000 – 600,000) * (19 - 15) =( ½ * 480,000 * 4) = 960,000
Resource Cost = (E + F + G) – G – E = 2,880,000– 960,000 – 480,000 = 1,440,000
Part 6v)
D + E = Dead Weight Loss
E = 0.5* (600,000 - 360,000) * (19 - 15) = ( ½ * 240,000 * 4) = 480,000
D = 0.5* (600,000 - 360,000) * (15 - 13) = ( ½ * 240,000 * 2) = 240,000
Dead Weight Loss = E + D= 480,000 + 240,000 = 720,000
Answer 7
Part 7i)
Firms better off position can be analysed from consumer’s surplus. After the imposition of
minimum wage, the surplus has decreased to a greater amount by (3,000,000 – 1,080,000) =
1,920,000 stating the firm is in a worse off condition after the minimum wage.

ECON111 MICROECONOMIC PRINCIPLES
Part 7ii)
The worker’s have been enjoying the additional surplus after the imposition of minimum
wage. The surplus after $19 imposition has increased by (2,700,000 – 1,500,000) = 1,200,000
receiving a high wage per hour.
Part 7iii)
The society has been facing a dead weight loss situation with resource lost. Earlier before
minimum wage, the wage rate ($15) was at equilibrium with no welfare loss. However, after
imposition of minimum wage, there is dead weight loss of 720,000. Also, with the decline in
firm’s surplus, the worker’s surplus has increased but shows a total decline in total surplus
from 4,500,000 ($15 wage rate) to 3,780,000 ($19 minimum wage rate).
Answer 8
Resource cost captured by the workers
Part 8i)
Consumer surplus = A = ½ * base * height
 Consumer Surplus = ½ * 360,000 * (25 - 19)
 Consumer Surplus = ½ * 600,000 * 6
Consumer Surplus or Firm’s Surplus = A = 1,080,000 (it remains the same as it is)
Part 8ii)
Earlier Producer Surplus or worker’s Surplus = B + C = 1,440,000 + 1,260,000 = 2,700,000
Resource Cost = (E + F + G) – F – E= 2,880,000– 960,000 – 480,000 = 1,440,000
DWL = E + D = 480,000 + 240,000 = 720,000

ECON111 MICROECONOMIC PRINCIPLES
Total Worker’s Surplus = B + C + (E + F + G) – F – E + E + D = B + C + G + D =
2,700,00 + 1,440,000 + 720,000 = 4,860,000
Part 8iii)
Total Surplus = Firm’s Surplus + Worker’s Surplus
 Total Surplus = 1,080,000 + 4,860,000
Total Surplus = 5,940,000
Part 8iv)
No DWL as it is considered under the worker’s surplus
Answer 9
The calculation done in part 7 change from part 8. This is because as the resource cost in job
is considered to be under worker’s surplus. It creates an additional surplus for the workers
with no change in firm’s surplus. Moreover, the total surplus increases by increasing social
welfare in the economy.
Answer 10
Ethically, setting up of higher minimum wage was the means to reduce unemployment and to
fire the unproductive workers. As a result, it started creating allocative inefficiencies by not
distributing the equality of marginal benefit and marginal cost such that the employers paying
the wage should be willingly accepted by the workers for a fixed period (Cothren and
Radhakrishnan 2018). However, this willingness was lost for the skilled labourers creating a
disparity in labour demand and supply (Altman 2016). The marginal cost of labour supply
was less than the marginal benefit received by workers. In addition, it not only hampered the
welfare of the economy but also created inequality in wages.

ECON111 MICROECONOMIC PRINCIPLES
Answer 11
The workers receive extra benefit when the minimum wage rate is imposed by the
government. As there is increase in wage, the workers supply with more hours of labour and
the firm is directed to hire for labour with a higher level of cost (Atkinson and Storey 2016).
However, creating excess labour supply in the market further leading to unemployment.
Although, the worker’s standard of living improves at the minimum wage rate but due to
hiring restriction by the firms; the workers who get unemployed or remain unemployed suffer
dearly by creating additional reserve of job resource cost (Ehrenberg and Smith 2016). It is
not ethically justified, that the existing unskilled labourers have higher standard of living by
neglecting the social welfare in the economy only by a portion of workers.
Answer 12
Minimum wage that is binding in nature leads to disequilibrium as the market is diminished
by demand followed by excess supply of labour creating allocating inefficiencies. Moreover,
it is not considered to be an appropriate tool for redistribution (Gerritsen and Jacobs 2016).
The minimum wage set by the government is to maintain standard of living but it
oversimplifies not only the unskilled labour market but marks to generate equivalent
productivity (Jardim 2017). However, for unskilled workers the binding wage rate can be
considered as a boon but for skilled labourers is the restriction imposed on their capabilities.
Without the minimum wage rate, when the economy is operating with the forces of demand
and supply, the equilibrium doesn’t distinguishes between skilled and unskilled labourers.
Also, it creates unemployment in the economy as the firm is not ready to hire more unskilled
labourers at this binding rate. As a result, the skilled labourers might lose their job further
creating a decline in surplus for the economy.

ECON111 MICROECONOMIC PRINCIPLES
References
"National Minimum Wage Orders". 2018. FWC. https://www.fwc.gov.au/awards-and-
agreements/minimum-wages-conditions/national-minimum-wage-orders.
Altman, Morris. "The living wage, economic efficiency, and socio-economic wellbeing in a
competitive market economy." In Forum for Social Economics, vol. 41, no. 2-3, pp. 166-186.
Routledge, 2012.
Atkinson, John, and David J. Storey. Employment, the small firm and the labour market.
Routledge, 2016.
Cothren, Richard, and Ravi Radhakrishnan. "Productivity growth and welfare in a model of
allocative inefficiency." Journal of Economics 123, no. 3 (2018): 277-298.
Ehrenberg, Ronald G., and Robert S. Smith. Modern labor economics: Theory and public
policy. Routledge, 2016.
Gerritsen, Aart, and Bas Jacobs. "Is a minimum wage an appropriate instrument for
redistribution?." (2016).
Jardim, Ekaterina, Mark C. Long, Robert Plotnick, Emma Van Inwegen, Jacob Vigdor, and
Hilary Wething. Minimum wage increases, wages, and low-wage employment: Evidence
from Seattle. No. w23532. National Bureau of Economic Research, 2017.