Question

1. Use a graph to explain why overtime wages are higher than the regular eight-hour shift wages. Explain why managers offer higher overtime wages.

2. Use a graph to explain economies of scale and why this is important to a manager

Answer 1

PART 1

Supply and Demand Analysis

In the labor market labor demands wage and is supplied by those who need labor. The supply and demand curve determine the equilibrium. This could be seen in the diagram below.

                               

Figure 16.c.i.1. The intersection of the demand and supply curve of labor gives a wage of $12 for 12 hours of labor.

In an attempt to save money employers discovered that they can pay a base wage of $8 an hour for the first eight hours worked and will offer $12 and hour as overtime pay for the four additional hours. This creates an urge to work in the mind of employees

                                 

Figure 16.c.i.2. Employers can pay $8/hr. for 8 hours and $12/hr. for 4 hours for a total of $112 instead of paying $12/hr. for 12 hours for a total of $144. The employer’s savings, $32, is represented by the shaded box, which is also called captured producer surplus.

The managers/employers are willing to pay extra wages to save their money. This move could only work if they are successful in making a cartel with other employers which will create a momentum and force the employees to work extra.

We can now analyze with the help of an indifference curve.

1. Indifference Curve Analysis

Because most employees’ labor supply curves are backward bending, meaning that after a certain point a wage increase will actually cause the employee to work fewer hours, the employer must offer an overtime wage in order to get the employees to work extra hours. This is illustrated using Income-Leisure graphs.

                                      

Figure 16.c.ii.1.   An employee with an endowment at E will work at point A, where the original indifference curve is tangent to the original budget line. The base wage is equal to the slope of budget line. If the employee is offered an overtime wage after 8 hours he will work at point B, where the new indifference curve (blue) is tangent to the new budget line (red). At point B the employee’s consumption of leisure has declined, which means that he has increased his hours of labor. An overtime wage intersecting point A will surely make the employee work more hours because he will be at a higher indifference curve.

There are cases where overtime pay won’t work. If the overtime pay does not get the employee on a higher indifference curve then he won’t increase his work hours.   

                                           

Figure 16.c.ii.2. In the above example, the employee is initially working 6 hours so implementing an overtime wage only after 8 hours will not be successful in getting the employee to work more hours because the new budget line (red) does not intersect the point A, which is at 6 hours. So the new budget line does not intersect at point A the employee will not move up to a higher indifference curve.

PART 2

Economies of scale refers to the benefits received to mass production of a commodity. Economies of scale reduces the cost and helps in increasing the production in the most efficient manner. It gives way to lower per unit cost and higher efficiency.

Economies of scale provides a lot of competitive advantage such as low per unit costs, specialized inputs, etc. Thus a lot of large firms prefer this method as compared to others. Firms such as intel, coca cola, apple, etc are large producers of economies of scale. They gives rise to a higher output and a lower input. Which also visible in the diagram above with a lower LAC (Long Run Average Cost). Thus economies of scale gives the manager a lot of benefits which he could reap during the process of production.