Applications of Demand and Supply Microeconomics

Topics: Supply and demand, Minimum wage, Price elasticity of demand Pages: 25 (8266 words) Published: March 12, 2013


S. No.| Topic| Page Number|
1| Price Floor| 3|
2| Price Ceiling| 9|
3| Rent Control| 12|
4| Taxing| 15|
5| OPEC Control Over Supply and Control| 20|
6| Can Good News For Farming Be Bad News For Farmers?| 24| 7| Drug Interdiction VS Drug Education| 26|
8| Short Answer Questions| 28|
9| Long Answer Questions| 30|
10| Multiple Choice Questions| 37|
11| Answer Key to Multiple Choice Questions| 41|

1) Price Floor (Minimum wage regulation)
Fig 1.1Fig 1.2
The minimum amount of compensation an employee must receive for performing labor. Minimum wages are typically established by contract or legislation by the government. As such, it is illegal to pay an employee less than the minimum wage.

The minimum wage attempts to protect employees from exploitation, allowing them to afford the basic necessities of life. The minimum wage rate fluctuates between countries, and sometimes between states or provinces.

Minimum wage : As an application of Theory of demand and supply. Case 1: When there is no wage control.
i.e wage is given at the market price

Fig 1.3

In this case the wage is given at market price and Labour of ‘Lg’ meeting wages at ‘We’ .

Case 2: When minimum wage is fixed below the market determined wage

Fig 1.4
There will be no effect on wages or employment when minimum wage is set below market wage as employer setting minimum wage (Wm) would not meet their supply hence would have to increase wages to market wage (We).

Case 3: when minimum wage is above market wage
As we can see from graph below that when minimum wage is set above market wage then there will be unemployment of workers, especially low skilled workers , or there can be lower efficiency due to low skilled workers doing high skilled work.

Fig 1.5
Minimum wages have drawn strong criticism from many economists, since it establishes a price floor on wages. Price floors can lead to a dead weight loss in the economy, which means that inefficiencies exist. In this case, the minimum wage might force companies to hire fewer employees, thus increasing unemployment. As of July 2008, the U.S. federal minimum wage rate was $6.55/hour. However, in states where the state minimum wage is higher than the U.S. federal minimum wage, workers must be paid the higher minimum wage.

Dead weight loss
Demand and supply curves of skilled and unskilled workers

Fig 1.6

Effects of min wage on skilled and unskilled workers

Fig 1.7
Above graph shows min wage if applied uniformly and on higher side can create more inefficiencies in unskilled workers category. Cost to society for such inefficiencies is called dead weight loss.

Qualitative analysis of minimum wage control
Advantages of minimum wage control
* Increases the standard of living for the poorest and most vulnerable class in society and raises average. * Motivates and encourages employees to work harder (unlike welfare programs and other transfer payments). * Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks. Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees. * Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid. * Encourages people to join the workforce rather than pursuing money through illegal means, e.g., selling illegal drugs * Encourages efficiency and automation of industry.

Disadvantages Minimum Wage Law
* As a labor market analogue of political-economic protectionism, it excludes low cost competitors from labor markets, hampers firms in reducing wage costs during trade downturns, generates various industrial-economic inefficiencies as well as unemployment, poverty, and price rises, and...
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