Chapter 5 - Policy analysis with supply and demand. After reading this chapter, you should be able to answer the following questions: What is a price floor? What is the effect of minimum wage on the market? What is a price ceiling? What is rent control? What is economics of a draft vs. voluntary enlistment? What is economics of market for human organs? What is economics of healthcare? What is economics of parking meters? What is economics of agricultural subsidies? | Chapter 5 Policy Analysis With Supply and Demand McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is a price floor? What is the effect of minimum wage on the market? What is a price ceiling? What is rent control? What is economics of a draft vs. voluntary enlistment? What is economics of market for human organs? What is economics of healthcare? What is economics of parking meters? What is economics of agricultural subsidies? 5- Price Floor Price floor = minimum legal price set by government. It affects only when set above the equilibrium price. Effective price floor creates surplus. Price Floor Supply Demand Price Quantity supplied after the price floor is imposed. Quantity demanded after the price floor is imposed. Quantity 78 60 40 $12 $8 Surplus 5- Minimum Wage and Market for Unskilled Labor Minimum wage = price floor in labor market. Minimum wage law increases wages of unskilled workers with jobs. . | Chapter 5 Policy Analysis With Supply and Demand McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is a price floor? What is the effect of minimum wage on the market? What is a price ceiling? What is rent control? What is economics of a draft vs. voluntary enlistment? What is economics of market for human organs? What is economics of healthcare? What is economics of parking meters? What is economics of agricultural subsidies? 5- Price Floor Price floor = minimum legal price set by government. It affects only when set above the equilibrium price. Effective price floor creates surplus. Price Floor Supply Demand Price Quantity supplied after the price floor is imposed. Quantity demanded after the price floor is imposed. Quantity 78 60 40 $12 $8 Surplus 5- Minimum Wage and Market for Unskilled Labor Minimum wage = price floor in labor market. Minimum wage law increases wages of unskilled workers with jobs. However it also creates surplus labor, which equals unemployment. It may cause firms to raise product prices. Minimum wage Supply Demand Wages per hour Number of unskilled workers 20,000 13,000 8,000 $6 $4 Unemployment 5- Elasticity of Demand and Minimum Wage Number of workers employed with no minimum wage Number of workers employed with minimum wage and inelastic demand curve Number of workers employed with minimum wage and an elastic demand curve. Number of Workers Wage Rate Supply of unskilled labor An inelastic demand for unskilled labor Minimum Wage An elastic demand for unskilled labor 9,800 10,000 2,000 Inelastic demand = demand for labor is not price sensitive. Elastic demand = demand for labor is very price sensitive. The more elastic demand for labor, the more jobs eliminated by minimum wage law. 5- Minimum Wage Minimum wages increase wages of workers with jobs. Surplus of labor created by minimum wage can result in worse working conditions. Minimum wages .
