A Level Economics AQA Practice Exam

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What determines wage levels in a labour market?

Government intervention
The bargaining power of unions
The interaction of supply and demand for labor
The level of competition among employers

The correct answer is: The interaction of supply and demand for labor

Wage levels in a labor market are primarily determined by the interaction of supply and demand for labor. When there is a high demand for labor, employers are willing to pay higher wages to attract the necessary workers. Conversely, when the supply of labor exceeds the demand, wages tend to decrease as employers have more candidates to choose from. This dynamic reflects the fundamental principles of microeconomics, where prices, including wages, are established through the interaction of supply and demand forces. Other factors like government intervention, the bargaining power of unions, and the level of competition among employers may influence wages but are secondary to the crucial role that supply and demand play. For instance, while unions can enhance wage levels through collective bargaining, their impact is often seen within the existing supply and demand framework. Similarly, government actions, such as minimum wage laws, can set a wage floor but do not change the underlying balance of supply and demand in the labor market. Competition among employers may affect wage levels specifically within certain industries or locations, yet the overarching mechanism remains the fundamental economic principle of supply and demand.