Some rationing mechanisms 1 long lines 2

Info icon This preview shows pages 33–36. Sign up to view the full content.

- Some rationing mechanisms: (1) Long lines ..... (2) Discrimination according to sellers’ biases - These mechanisms are often unfair, and inefficient: the goods do not necessarily go to the buyers who value them most highly. - 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). 2. Price Floor: A legal minimum on the price of a good or service. E.g. Minimum Wage - If the minimum price is above the equilibrium then is it BINDING. This generates a surplus. - If the minimum price is below the equilibrium then it is NOT BINDING. - Suppliers are supplying more and people are buying less.
Image of page 33

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Example: The Market for Unskilled Labour (The Minimum Wage): You are pushing up the wages for workers that are unskilled. Situation One: A price floor below equilibrium is NOT BINDING therefore it has no effect on market outcome. Situation Two: The equilibrium wage ($4) is below the floor and therefore illegal. The floor is a binding constraint on the wage, therefore it causes a surplus= Unemployment. This is because the number of people looking for jobs has increased, but the amount of jobs available has decreased. NOTE: Minimum wage laws do not affect highly skilled workers. - The more elastic the labour demand curve, the more job losses there will be. Where the demand curve hits the minimum wage line this is the amount of labour demanded. Where the supply curve hits the minimum wage line this is the amount of labour supplied. As the price of labour increases, there will be unemployment, however the main problem will be job loss, because the demand for labour will decrease. Unemployment= labour supplied increases, and the labour demanded decreases, causing job loss.
Image of page 34
- Therefore, maybe the minimum wage is not the best policy to help unskilled workers. Therefore we should look at... ALTERNATIVES TO THE MINIMUM WAGE 1. Wage subsidy : This is when the govt. pays a portion of workers wages that are in the program. 2. Employment tax credit : The govt. reduces firms taxes if they hire workers that are part of the program Example Two: Agricultural Price Supports - Over time we’ve seen a massive decline in the percentage of workers in the United States. However, our access to food has not been affected due to the fact that productivity within the agriculture sector has increased. - This increase in productivity = Shifts the supply curve to the right significantly. - Demand increases by a little = Shifts the demand curve to the right by a little - Due to the fact that supply is increasing more than demand, the equilibrium price is going to decrease. - Therefore, the govt. puts in a “price support”, this is a minimum price that is put in place. This price floor however, is higher than the equilibrium price. RESULT: Quantity supplied increases, quantity demand is unchanged because the demand for food is inelastic. This creates a surplus because quantity supplied is more than quantity demanded. However, because demand for food in inelastic as price increases total revenue increases as well.
Image of page 35

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 36
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern