a. Explain why the introduction of a minimum price above the equilibrium price reduces social welfare.
“A minimum price occurs when a price is set by the government and firms cannot charge less than this” (Gillespie, 2011) in order for the minimum price to be effective it must be above the equilibrium price - this occurs when supply and demand are balanced whilst disregarding all external factors.
(Figure 1)
(Gillespie, 2011)
The formation of equilibrium comes when the goods demanded are equivalent to the goods provided (DS); this allows the government to set a price floor (P1); this benefits society as in order for the market to be efficient minimum price must be above the; as when the supply produced exceeds (Q1) that demanded (Q2) by the public this allows consumers who can afford the goods or services to purchase regardless of the prices – this is beneficial to the reduction of social welfare as will suppliers have excess quantity, this drives as a trigger for producers to reduce their prices towards the price floor in order to increase demand for their product or service to make optimal profits allowing for consumers to get the best price as well as increasing consumer surplus for the original consumers.
(Figure 2)
([price_controls_ceiling, n.d.)
With the minimum price being below the equilibrium the demand will be excessive (Qd) in comparison to the supply produced (Qs) meaning that for the price the buyers are willing to pay the suppliers are only willing to supply a said amount of goods or services; causing the consumer surplus and the producer surplus to be lost due to the reduced quantity manufactured, this area then becomes dead weight loss; this can be avoided through the relocation of resources, though this creates a situation “in which nobody in an economy can be made better off without somebody else becoming worse off” (Nuttall and Lobley, 2001) known to be Pareto efficiency; as a result reducing wastage in resources which can impact negatively causing an increase in social welfare and ultimately clarifies that having the minimum price above equilibrium reduces social welfare.
b. Explain why a profit maximizing firm produces the output that equates marginal revenues to marginal costs (MR=MC).
The Island of Mocha in the video is an example of a traditional economic system evolving into a market system. Every person plays a key role in this traditional system. They had fisherman, coconut collector, melon seller, lumberman, barber, doctor, preacher, brownies seller, and a chief. The Mochans got sick of trading goods all across the island just to get the things that they want or needed. The Chief decided that they would use clam shell for currency instead of trading.
Minimum wage is the lowest hourly wage an employer is legally permitted to pay an employee. Most employees are eligible for minimum wage, whether they are full-time, part-time, casual employees, or are paid on hourly rate, commission, piece rate, flat rate or salary. There are several different classes, which determine what minimum wage you will be entitled too. These classes are: General Minimum Wage, Liquor Servers Minimum Wage, Hunting and ...
Understanding the basic concept of minimum wage is important for every single individual. We all live in this world together, and it is obvious that there is an order. In order to continue our lives and afford our basic needs, we all need to work and gain wealth. As the old adage says ‘‘There ain’t such a thing as a free lunch. ’’
Minimum wage is a difficult number to decide on because it affects different income earning citizens in different ways. According to Principles of Microeconomics, by N. Gregory Mankiw, minimum wage is a law that establishes the lowest price for labor that and employer may pay (Mankiw 6-1b). Currently, the minimum wage in the United States is $7.25 per hour. For many years politicians and citizens have argued on what should be the minimum wage that would benefit the economy and society in general. A minimum wage was first established in 1938 to increase the standard of living of lower class workers. To discuss what is better for the country and its citizens, people have to understand what is a minimum wage and what are its effects.
Therefore, raising the minimum wage is beneficial to the economy as it creates jobs and raises the income of millions of people across United States and Canada. The government needs to raise the minimum wage as it raises the income of people, which saves the taxpayers money and allows it to be used on things such as schools and fixing roads. Also, increasing the minimum wage creates wage growth, which helps grow the GDP, as people have more disposable income. Lastly, increasing the minimum wage reduces the wage gap between the CEOs and working class, with the purpose of distributing more of the profits to the working class to help pay for health care and education. In today’s world of capitalism, there should be a cap on how much one can make in a year in order to help the working class, who ultimately help keep the companies in business.
People tend to believe a federal mandated minimum wage helps the poor, and counteracts poverty. Darius Ross, of the Rockland County Times, believes that “raising the minimum wage will put more money in the pockets of workers who most need to spend those dollars. It will boost consumer spending at local businesses across the state. And nothing drives business owners like me to hire additional workers more than increased consumer demand”. While Ross makes a good point that raising the minimum wage will add to the disposable income of certain people, he does not mention what this raise will actually do. Minimum wage sets a price floor. A price floor, simply stated, is a price limit placed on businesses telling them they cannot offer the good or service being sold below a certain price. A price floor creates shortages, and in the case of minimum wage, that shortage is jobs and the result is an increase in unemployment. Some economists argue federal minimum wage forces businesses to share some of the vast wealth with the people who help produce it. Businesses can exploit their workers by paying them “off the books” to avoid minimum wage, and taxes. Ag...
The definition of Minimum Wage is “an amount of money that is the least amount of money per hour that workers must be paid according to the law” (Minimum wage). Minimum wage, like other laws, are used to keep the economy in line. Minimum wage laws were invented in Australia and New Zealand with the purpose of guaranteeing a minimum standard of living for unskilled workers. (Linda Gorman) Minimum wage puts a price on the services one offers. Many different principles can be used to explain Minimum wage and explore the different aspects of it. Including what minimum wage does for our economy and the current status of it.
Equally, a higher minimum wage attracts new players in the competition, making the hiring process hard and unguaranteed. On the demand side of the market, if the minimum wage exceeds the normal market wage, considering the law of supply and demand, some workers will lose their jobs or have their hours cut (The minimum wage delusion/Forbes Magazine). The evidence from past directs that increase in the minimum wage has led to a small percent of decrease in employment of low-skilled workers slowly rising unemployment (Mises
The first important concept I learned was the ‘goals of monetary policy’. The primary goal of a central bank is price stability (low and stable inflation). Some of the Feds (short for the Federal Reserve Bank) other concerns are:
The market supply curve in a perfect competitive market is the horizontal summation of all the individual firm’s marginal cost. This mathematically means that S = MC. And this curve represents the monopoly’s marginal cost curve. Equilibrium in perfect competition occurs where the quantity demanded of a good is equal to the quantity supplied at quantity (QC ) and price (PC.) Whereas equilibrium output for a monopoly, QM, occurs where marginal revenue equals marginal cost, MR = MC. And its price, PM, occurs on the demand curve at the profit-maximizing quantity. Because marginal revenue is less than price at each output level, QM < QC and PM > PC. Comparing this to that of a perfect competitive market, monopoly limits its output and charges a greater price that is on the elastic range of demand as shown in the diagram
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
A single firm or company is a producer, all the producers in the market form and industry, and the people places and consumers that an Industry plans to sell their goods is the market. So supply is simply the amount of goods producers, or an industry is willing to sell at a specific prices in a specific time. Subsequently there is a law of supply that reflects a direct relationship between price and quantity supplied. All else being equal the quantity supplied of an item increases as the price of that item increases. Supply curve represents the relationship between the price of the item and the quantity supplied. The Quantity supplied in a market is just the amount that firms are willing to produce and sell now.
As with all markets and their respective economies, having equilibrium is one of the key factors of a successful system. Although most markets do not reach equilibrium, they attempt at getting close. There are numerous methods devised to reach equilibrium, whether they involve human intervention directly or a cumulative decision by all factors involved. These factors may be a seller's willingness to lower overall revenue, or a buyer's willingness to withhold some demand for a certain product. Of course, the basics of supply and demand retrospectively control the equilibrium in the market.
It is the role of every government to safeguard its people in all matters including controlling the economy. Every economy faces different challenges including the business cycles that may emanate from the global market. In this paper we try to examine measures taken by the UK’s coalition government in trying to ensure that the economy benefits every citizen and reduces the overall burden to it. We consider the recent comprehensive review on spending.
...n the companies will have to decrease the price otherwise the product will not be sold at higher prices and the revenue would not be as large as companies would like to.