Chapter 6 - Minimum wage creates unemployment When S&D...

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Chapter 6: Supply, Demand, and Government Politics Example 1: The Market for Apartments o When there’s a price ceiling. It is a binding constraint on the price, causing a shortage . o In the long run, supply and demand are more price-elastic. So the shortage is larger Shortages and Rationing o With a shortage, sellers must ration the goods among buyers. o Some rationoning mechanisms: (1) Long lines (2) Discrimination according to sellers’ biases o These mechanisms are often unfair and inefficient: the goods do not necessarily go to the buyers who value them most highly. o In contrast, when prices are not controlled, the rationing mechanism is efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair) Example 2: The Market for Unskilled Labor o When Price floors above equilibrium (minimum wage) Quantity of people willing to work increases Quantity of people demanded by firms decreases.
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Unformatted text preview: Minimum wage creates unemployment. When S&D are more inelastic, unemployment is less Min wage laws don’t affect highly skilled workers They do affect teen workers Studies: A 10% increase in the min wage raises teen unemployment by 1-3% ⇒ Evaluating Price Controls o Recall that Markets are usually a good way to organize economic activity o Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices o Price controls often intended to help the poor, but often hurt more than help. ⇒ Taxes o The govt levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc. o The govt can make buyers or sellers pay the tax. o The tax can be a % of the good’s price, or a specific amount for each unit sold. o For simplicity, we analyze per-unit taxes only...
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This note was uploaded on 01/22/2012 for the course ECON 102 taught by Professor Yotsubo during the Fall '08 term at Rutgers.

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