OCR A Level Economics: Supply of labour, economic rent and wage models (H460) – Revision Notes

These notes condense the supply side of OCR A Level Economics (H460) Wage determination and the wage models (specification Version 3.0, June 2026, first assessment in 2021). Content is examined in Component 1, Microeconomics, and the specification labels none of it as AS or Extension. For full explanations read the study guide, then test yourself with the practice questions. Related pages: the OCR Economics hub, the printable checklist, the Microeconomics revision notes and the free diagnostics. All figures here are invented and illustrative.

Key definitions

Term	Meaning
Supply of labour	Hours or people offered to employers at each possible wage
Wage elasticity of supply (EWS)	% change in labour supplied ÷ % change in wage
Monetary factors	Wage, overtime, bonuses, cash benefits, tax
Non-monetary factors	Satisfaction, hours, risk, location, status, security, training
Transfer earnings	Minimum payment to keep a worker in the job (next best alternative)
Economic rent	Earnings above transfer earnings
MRP	Extra revenue from the last worker hired
ACL / MCL	Average / marginal cost of labour
Monopsony	A single (or dominant) buyer of labour
Bilateral monopoly	Monopsony employer facing a single union
Wage differential	Gap in pay between jobs, groups or regions

Supply: factors and elasticity

• A wage change is a movement along the supply curve. Population, migration, participation, training costs, pay elsewhere and non-monetary conditions shift the curve.
• EWS is higher with short training times, high mobility, spare labour, long time periods and few entry barriers.
• Short run: the workforce is mostly fixed (overtime, poaching). Long run: training, migration and new entrants.

Worked reminder. Wage up from £9.00 to £9.90, supply from 500 to 515 workers.

Wage  +10%    Supply +3%
EWS = 3 / 10 = 0.3  (inelastic)

Individual labour supply

Effect	Wage rise causes	Hours
Substitution	Leisure dearer, work more attractive	Up
Income	Same income in fewer hours, buy more leisure	Down (if leisure is normal)

Diagram in words. Leisure on the horizontal axis, income on the vertical. A wage rise pivots the budget line to a steeper slope. Substitution effect: a move along the original indifference curve to less leisure. Income effect: a shift to a higher indifference curve, with more leisure. Net effect = sum of the two.

• Low wages: substitution dominates, so the curve slopes upward.
• High wages or a target income: the income effect can dominate, giving a backward-bending section.
• Evaluate: fixed contract hours, taxes, overtime rules, family commitments, and the fact that the market curve still slopes upward as new workers enter.

Economic rent and transfer earnings

Method for a linear supply curve w = a + bL at equilibrium (L, w):

Total earnings    = w x L
Economic rent     = 0.5 x (w - a) x L     (triangle above supply)
Transfer earnings = total - rent          (area under supply)

Example. Supply w = 3 + 0.01L and wage £13. Then L = 1,000. Total = 13,000, rent = 0.5 x 10 x 1,000 = 5,000, transfer earnings = 8,000. Check: 5,000 + 8,000 = 13,000.

Individual. A person earns £40,000 and could earn £28,000 elsewhere. Transfer earnings are £28,000 and rent is £12,000, which is 30% of earnings.

• More inelastic supply means a larger share of earnings is rent. Perfectly inelastic: all rent. Perfectly elastic: all transfer earnings.
• Stronger demand lifts the wage, and rent grows with it.
• Better alternative jobs raise transfer earnings.

Competitive labour market

Assumptions: many employers and workers, homogeneous labour, perfect information, mobility, wage takers. The firm hires while MRP is at least the wage, so wage = MRP at the margin.

Workers	MRP (£)
1	24
2	20
3	16
4	12
5	8

At a wage of £14 the firm hires 3 workers (the 4th adds only £12).

Market equilibrium. MRP: w = 24 - 0.02L. Supply: w = 4 + 0.03L.

24 - 0.02L = 4 + 0.03L  ->  20 = 0.05L  ->  L = 400
w = 4 + 12 = £16   (check: 24 - 8 = 16)

Shifts: more demand (higher MRP) raises wage and employment; less supply (for example a new licence) raises the wage and cuts employment.

Trade unions

Method in steps:

1. Read employment from the demand curve at the union wage.
2. Read the number willing to work from the supply curve.
3. Unemployment = supply minus demand.
4. Compare wage bill (wage x employment) before and after.
5. Use the midpoint method for elasticity if the change is big.

Example, same market, union wage £19.

Demand: (24 - 19)/0.02 = 250 employed
Supply: (19 - 4)/0.03  = 500 willing   -> 250 unemployed
Wage bill: 16 x 400 = 6,400  ->  19 x 250 = 4,750 (falls)
Midpoint: L -46.2%, w +17.1%  ->  elasticity = -2.69 (elastic)

When demand is elastic, the union’s gain per worker comes at a larger loss of jobs. When inelastic, the wage bill rises. Evaluate: union density, strike threat, capital substitution, productivity gains and whether the union represents insiders only.

Monopsony

• The monopsonist faces the supply curve (ACL). MCL is above ACL and steeper, because a higher wage must go to all workers.
• Hire where MCL = MRP, then pay the wage shown on the supply curve for that employment level.

Example, same curves. Total cost of labour = 4L + 0.03L^2, so MCL = 4 + 0.06L.

4 + 0.06L = 24 - 0.02L  ->  L = 250
Wage = 4 + 0.03 x 250 = £11.50
MRP  = 24 - 5 = £19.00   (MCL = 4 + 15 = 19)
Gap (MRP - wage) = £7.50

Against competition (400 at £16): employment is 37.5% lower and the wage 28.1% lower.

Policy twist. A binding wage floor at £16 makes the supply curve flat at £16 for the firm. Demand at £16 is (24 - 16)/0.02 = 400 workers and supply is also 400, so employment rises from 250 to 400. A floor above £19 cuts employment below 250.

Bilateral monopoly

• Employer pushes to the monopsony outcome (here £11.50 and 250). The union pushes for a higher wage.
• Theory gives a range, not a single point. The result depends on bargaining power, strike and lock-out threats, information and the cost of failing to agree.
• A union may offset monopsony power and raise both wages and employment, but an over-aggressive union can cut jobs.

Wage differentials

Reason	Link
Compensating differentials	Risky or unsocial work pays more
Human capital and skills	Higher MRP and costly training
Scarcity, barriers to entry	Licences, rare talent, inelastic supply
Demand and productivity differences	Different MRP by sector
Unions	Bargaining premium
Monopsony, discrimination	Pay below MRP
Region, sector, information	Cost of living, public-sector scales, mobility

Example. £22 an hour for dangerous night work versus £16.50 for daytime: a premium of (22 - 16.50) ÷ 16.50 = 33.3%.

Usefulness of the models

• Competitive MRP: best for many employers and measurable output; weak for public services and team output.
• Monopsony: best where one big employer dominates a small labour market or a specialist occupation.
• Union and bilateral models: best where collective bargaining is strong.
• Regional differences come from mobility and living costs; occupational differences from skills, licensing and output measurement.
• Judgement: no single model fits every sector. State which one fits the case and why.

Must-know distinctions

• Movement along supply versus shift of supply.
• Substitution effect versus income effect.
• Economic rent versus transfer earnings.
• ACL (the wage) versus MCL (what the extra worker costs the monopsonist).
• Wage elasticity of supply versus wage elasticity of demand.
• Short-run versus long-run supply.

Quick self-test

1. Wage rises 8% and labour supplied rises 12%. Calculate EWS.
2. A person earns £55,000 and her next best job pays £44,000. State her economic rent.
3. Give two non-monetary factors that affect supply.
4. A firm with the MRP table above faces a wage of £14. How many workers does it hire?
5. In the competitive market, what are the wage and employment if supply becomes w = 8 + 0.03L?
6. In which direction does the income effect move hours after a wage rise?
7. In the monopsony example, what is the gap between MRP and the wage?
8. Why can a wage floor raise employment under monopsony?
9. Why does bilateral monopoly have no unique outcome?
10. Job A pays £18 and job B pays £24 because it is dangerous. Calculate the premium.

Answers

1. 12 ÷ 8 = 1.5.
2. 55,000 - 44,000 = £11,000.
3. Any two: job satisfaction, hours, risk, location, status, security, training.
4. MRP of 3rd worker is £16 (at least 14), 4th is £12 (below 14): 3 workers.
5. 24 - 0.02L = 8 + 0.03L gives L = 320, w = 8 + 9.6 = £17.60 and 320 workers (check 24 - 6.4 = 17.60).
6. Down (more leisure, if leisure is normal).
7. 19 - 11.50 = £7.50.
8. The floor makes the marginal cost of labour equal to the floor wage up to the supply limit, so hiring more no longer raises the wage for everyone; employment rises until MRP equals the floor.
9. Two powers meet, so the wage lies in a range set by bargaining strength.
10. (24 - 18) ÷ 18 = 33.3%.

Where marks are usually lost

• Writing “demand” or “supply shifts” when only the wage has changed.
• Treating all earnings as economic rent.
• Reading the monopsony wage off the MCL curve instead of the supply curve.
• Drawing the diagram but not naming the axes, curves and equilibrium points.
• Not following a union wage through to unemployment and the wage bill.
• Saying a wage floor always cuts jobs without separating competitive markets from monopsony.
• Describing the substitution and income effects without saying which dominates and why.
• One-sided answers to “evaluate” questions: no judgement on which model fits which sector.

Official syllabus

OCR, A Level in Economics (H460), specification Version 3.0 (June 2026), for first assessment in 2021, published by OCR.