Pure Economic (Part - 4), Economy Traditional UPSC Notes | EduRev

Economy Traditional for UPSC (Civil Services) Prelims

UPSC : Pure Economic (Part - 4), Economy Traditional UPSC Notes | EduRev

The document Pure Economic (Part - 4), Economy Traditional UPSC Notes | EduRev is a part of the UPSC Course Economy Traditional for UPSC (Civil Services) Prelims.
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Quasi Rent 

  • The concept of Quasi Rent was used in Economics by Dr. Marshall, for the extra income earned by man-made factor, other than land, whose supply remains fixed in the short period. 
  • Marshall, “The term Quasi Rent will be used in the present volume as income derived from machines and other application made by man.” 
  • The term “Quasi” is derived from Latin language. It means, “ as if.” So, Quasi rent arises in case of land because the supply of land is limited. In short period, means of production made by man are also limited in supply. Hence income of these man-made means of production is like rent.
  • But it cannot be called, rent because the supply of these means of production can be increased in the long-run according to their demand. 
  • Thus, these means cannot earn a surplus or rent in the long-run. Hence, it is quasi rent. 
  • According to Silverman, “Extra payment made to those factors of production whose supply is fixed in the short period but variable in the long-period, is called quasi rent.:
  • Bilas, “Quasi rent is the difference between total revenue and total variable costs.”

Difference between Rent and Quasi Rent

  1. Quasi rent accrues only to man-made fixed factors of production, while rent can accrue to any factor of production.
  2. Quasi rent is only a short period phenomenon, because some factor of production are fixed only in the short period. Rent is available at all times. 
  3. Quasi rent is the surplus generated over and above the variable costs of production during the short period. Rent is the surplus generated over and above all the costs of production.

Real Wages

  • If other things remain the same, especially  the prices, increase in nominal wages will lead to increase in real wages, because then the wage-earner will be able to get more goods and services.
  • Price level refers to the purchasing power of money. When price level moves up the purchasing poser of money goes down.
  • Real wages of a labourer would be more if besides nominal wages he also receives supplementary income form his employer in the form of free meals, uniform, medical facilities, etc.
  • Real wages also depend upon the fact whether the employment is regular or casual. Regularity of job implies higher real wages while uncertainty of job implies lower real wages.
  • If a worker by working less number of hours gets the same money wages as the other worker who works for long hours, then the real wages of the former will be more than the latter. The former can supplement his income by doing some work in his spare hours.
  • If two labourers get the same nominal wages, but the one works under clean and healthy conditions whereas the other has to work under dirty and unhealthy conditions, then the real wages of the former will be more than the latter. The latter will have to spend part of his income on medicines whereas the former will have to incur no such expenditure.
  • If a worker has to spend a part of his money wages on professional expenses, his real wages will be low.
  • Engineers, Doctors and Advocates etc. have to receive training before entering into their profession. It involves time and money expenses. Hence to work out the real wages of the professionals these expenses must be deducted from their money income.
  • Dependents of those working in Railways, Bank, Army etc. get preference at the time of recruitment to those services. Hence the future of such dependents is quite secure. This economic security enhances the real income of the employees of these services.
  • If the future prospects of a job are quite bright and promising then even if the money wages are low to begin with , the real wages will be considered high.
  • A head clerk and a police sub-inspector may receive the same money wages, but a police sub-inspector commands more respect in the society than a head clerk. Hence, the real wages of the sub-inspector are considered to be high.
  • Real wages will be more if there are opportunities of extra earnings in spare time. College teachers may write books to make extra earnings. 

Wages Differ

  • There may be barriers to entry in certain professions. For example, in defence services, female warriors are generally not preferred. Because of this supply remains scarce and accordingly wages are relatively high.
  • ‘Specialised’ skills (like software engineers) are relatively more scarce than ‘generalised’ skill like primary school teachers. Accordingly high wages are offered in occupations of specialised skills.
  • Mobility of labour depends not only on monetary considerations, but family and social considerations as well. Accordingly wages differ across different regions and occupations.
  • High non-monetary benefits as free accommodation, free medical facilities may attract greater flow of labour in certain occupations. Eventually money wages may fall in these occupations.
  • Because of high cost of initial training certain occupations. Eventually attract only a limited supply of labour. Accordingly wages are high.
  • Also, jobs with high risk factor (such as of pilots) attract only a limited supply of labour. Hence wages are high.

Modern Theory of Wages 

  • Modern Theory of wages asserts that wages are that price of the services of labour. Hence just as according to General Theory of Value, price of any commodity is determined by its demand and supply. 
  • Similarly, price of the services of the labour or the wage-rate is also determined by the demand and supply of labour. The study of determination of wages therefore calls for a close examination of demand for and supply of labour.
  • Demand for labour is made by the producer in the factor market. Labour is demanded because it helps in production.
  • Demand for labour is a derived demand.
  • Demand for labour depends upon the demand for those goods and services which it helps to produce.
  • Demand for labour is that number of labourers which the employer wants to engage at the existing wage rate.

Wage Determination Under Perfect Competition

  • Under perfect competition, equilibrium wage rate will be determined at that point where demand for and supply of labour will be equal for the industry.
  • In other words, it can be said that under perfect competition, in the long run, the labourers will get wages equal to their marginal productivity (VMP).

Trade Unions and Wages

  • The workers organise themselves into trade union to get higher wages.
  • Trade unions force their employers to increase the rate of wages by actions such as striker, pickets, dharna, gheraos and bocotts. The trade unions can raise wages upto a certain limit only.
  • After that limit, the actions of trade unions may lead to increase in unemployment.
  • To  firm the marginal cost of employing labour should not exceed it marginal revenue productivity.
  • It means that the wages for the employment of a marginal worker in an industry must equal to its marginal revenue productivity. 

Full Employment 

  • Ordinarily, the term full employment refers to the situation in which no one is unemployed. Demand for and supply of labour are equal. In macro economics, ‘full employment’ means a situation in which at a given level of real wage, demand for labour is equal to its available supply.
  • Thus, the term full employment is used to signify a situation in which ordinarily all those people who are willing to work at the prevailing wage-rate, get work.
  • Lerner, “Full Employment is a situation in which all those who are able and want to work at the existing rate of wage get work without any undue difficulty.”
  • Practically, full employment means that number of vacancies is more than the unemployed persons. Even in full employment situation some kind of unemployment may exist. In modern dynamic economy, due to constant change in demand for and supply of labour, it is not possible that all those who want to work may get work all the time.
  • Spencer, “Full employment is a situation in which everyone who wants to work is working except for those who are frictionally and structurally unemployed.”
  • It is clear from the above defination that in situation of full employment also there can be some types of unemployment.
  • As such, according to modern macro economic full employment does not mean lack of unemployment. It simply means a situation of equilibrium between vacant jobs and qualified job-seekers.

Voluntary and Involuntary Unemployment 

  • Voluntary unemployment refers to the situation when a person is unemployed  because he is not willing to work at the existing wage rate, even when work is available.
  • Involuntary Unemployment is a compulsion to remain unemployed because jobs are not available in the market. 
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