Search activity q 2 q 1 d 2 s 1 p 1 p 2 d 1 rent

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Search Activity Q 2 Q 1 D 2 S 1 P 1 P 2 D 1 Rent (rands) Quantity P 3 At Q1 the marginal consumer would be willing to pay P3. This means that he/she would be willing to spend an extra (P3- P1) to find a good. For example, someone might be willing to pay the extra difference to an estate agent to help them find and secure accommodation. Search activities increase when a price ceiling creates a large shortage in the market.
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Black Markets An illegal/informal/unregulated market that runs parallel to a legal, but restricted, market. For example: Zimbabwe’s black market for currency during the periods of hyperinflation. In our example of rent controls land lords may find illegal ways of extracting consumer surplus and matching the price with each consumer’s WTP.
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Price Floors WHAT HAPPENS IF THE PRICE FLOOR IS SET BELOW THE MARKET PRICE? Q 1 S 1 P E D 1 Rent (rands) P 0 What would the impact be of a price floor set at P 0 be?
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Legislated Nominal Hourly Minimum Wages in South Africa (2012/13) 9.63 11.66 12.39 12.71 14.45 18.92 18.97 0 2 4 6 8 10 12 14 16 18 20 Domestic Work (Area A) Agriculture Hospitality (<10 employees) Taxi Drivers Contract Cleaning Wholesale and Retail Clerks Civil Eng. (low skilled) Source: Department of Labour, Sectoral Determinations, 2012/3
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What if we introduce a minimum wage? Notice that a price floor below equilibrium price has no effect on equilibrium Q 2 S 1 P 3 P 1 D 1 Rent (rands) Quantity This would mean that no employer could pay their workers less than P 1 This means that a surplus of labour (i.e. unemployment) equal to Q 1 Q 3 Let’s see how this divides up into consumer and producer surplus BOTTOM LINE: there is a deadweight loss given by the grey shaded area (also think about search costs) Q 1 Notice that this is an example of a price floor Q 3 unemployment P 2
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Q 2 S 1 P 3 P 1 D 1 Rent (rands) Quantity Q 1 Q 3 unemployment P 2 In some sectors, this producer surplus may be lost to search activities and transaction costs. For example, labour may be willing to an employment agency or labour broker a portion of their income in order secure work. This would be a loss to their producer surplus.
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Minimum wages: A South African case study: Wage Tables for the Domestic Worker Sector Table 1 Minimum wages for domestic workers who work more than 27 ordinary hours per week Area A Minimum rates for the period 1 December 2011 to 30 November 2012 Minimum rates for the period 1 December 2012 to 30 November 2013 Minimum rates for the period 1 December 2013 to 30 November 2014 Hourly Rate (R ) 8.34 Hourly Rate (R ) 8.95 Previous years minimum wage + CPI*** +1% Hourly Rate (R ) Previous years minimum wage + CPI*** +1% Weekly Rate (R ) 375.19 Weekly Rate (R ) 402.96 Weekly Rate (R ) Monthly Rate (R ) 1625.70 Monthly Rate (R ) 1746.00 Monthly Rate (R ) Wages in Area A will be subjected to a CPI plus 1% increase for the period 1 December 2012 to 30 November 2013. The CPI*** (for the lowest quintile) six weeks prior to 1 December 2012 has been 6,4%.This means that wages for this period was calculated as follows: CPI (for the lowest quintile) plus 1% for Area A = 6,4% + 1% =7.4%.
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Hertz (2004) Have Minimum Wages Benefited South Africa’s Domestic Service Workers?
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