Question

Consider the market for theatre actors where some actors are paid high wages and some are paid low wages. Some actors are ready to work even at zero wages. Show on a graph what happens if all the actors must be paid the highest wage rate necessary to attract more actors into the industry. What is the economic rent earned by the actors?

Short answer

Economic rent is the area above the supply curve and below the highest wage line.

Step-by-step solution

Define Wage Rate and Economic Rent

The wage rate is the compensation per period for an actor. Economic rent is the difference between what one is paid and the minimum one would accept. Here, economic rent is the surplus in earnings over their reservation wage, which could even be zero for some actors.

Graph the Supply and Demand for Actors

Graphically, the supply curve of actors typically slopes upwards, showing that higher wages attract more actors. The demand curve slopes downwards, as higher wages reduce the quantity of actors demanded. The prevailing wage, where the supply and demand curves intersect, represents the market equilibrium wage.

Adjust Wage Rate to Highest Rate

In the scenario where all actors are paid the highest wage rate, we move the equilibrium point upward along the demand curve to that highest wage level. On the graph, draw a horizontal line at this new constant wage rate to show the shift.

Determine Economic Rent

Economic rent is represented by the area between the supply curve and the horizontal wage line, extending from zero up to the quantity of actors still employed at this higher wage. This graphical area signifies the total economic rent earned by the actors.

Key concepts

Wage Rate

In any profession, the wage rate is the amount paid to individuals over a specific time. For theatre actors, this can vary widely based on demand and talent. Some actors might be compensated highly while others may be willing to work for free to gain exposure.

Think of the wage rate as the minimum price at which actors are willing to perform their roles. When the wage rate is adjusted so that all actors receive the highest necessary wage, it might attract more talent into the industry.

However, this also means a fixed higher expense for the theatre companies. The wage rate doesn't just impact an actor's income but also shapes the entire industry's economic landscape. Changes in the wage rate can adjust how many actors are available or willing to work in the market.

Supply and Demand

The principles of supply and demand apply to the market for theatre actors just as they do in any other market.

**Supply Curve**: - Represents the number of actors willing to work at various wage levels. - Typically slopes upwards, meaning more actors are willing to work as wages increase.

**Demand Curve**: - Shows the quantity of actors that theatre companies are willing to hire at different wages. - Slopes downwards, indicating that the higher the wage, the fewer actors companies will want to hire.

This interplay forms the basis of market competition. Changes in either supply or demand pressures can influence wages significantly. High demand for actors but limited supply will push wages up, while an excess supply of actors with limited demand can depress wages.
When all actors are paid a high wage rate, the supply might increase but companies may demand fewer actors. This might create an imbalance or surplus of available actors.

Market Equilibrium

Market equilibrium occurs where the supply and demand for actors meet. It's the point on a graph where the supply curve and the demand curve intersect.

At this intersection, the wage rate is set at a level where the number of actors willing to work equals the number theatre companies want to hire. This harmony helps ensure that the market functions smoothly.

When all actors are paid a uniformly high wage, the equilibrium shifts. The horizontal line representing this wage crosses the demand curve at a new point, possibly leading to less demand for actors.

Economic rent, in this instance, is the surplus payment actors earn over what they would have accepted as the minimum wage. This rent can be significant if the wage increase is steep but could also limit how many actors are employed, affecting overall market balance.