Question

Chapter 6 Government Actions in Markets

5) What happens to the quantity of labor supplied, the quantity of labor demanded, and the number of unemployed workers if the minimum wage rate set above the equilibrium wage is increased still higher?

6) Discuss the inefficiencies created by a price floor.

7) Compare and contrast a price ceiling and a price floor.

8) How does a production quota influence farm prices and output?

Answer 1

5. Labor markets have curves of demand and supply, just like commodity markets. The rule of demand works this way in labor markets: a higher wage or wage — that is, a higher labor market cost — leads to a reduction in the amount of labor demanded by employers, while a lower wage or salary contributes to an increase in the amount of labor demanded. The demand principle often operates in labor markets: a higher labor cost contributes to a higher labor supply quantity; a lower price leads to a lower supply quantity.

Suppose the minimum wage is just slightly below the wage level of equilibrium. Wages could fluctuate above this price floor according to market forces, but they would not be allowed to move under the floor. The price floor minimum wage is said to be non-binding in this case — that is, the price floor does not decide the outcome of the business. Even if the minimum wage rises just a little higher, as long as it remains below the equilibrium level, it will still have little effect on the amount of jobs in the economy.Even if the minimum wage is increased by enough to rise marginally above the balance wage and become binding, there will only be a small excess supply difference between the required quantity and the supplied quantity.

6. Imposing a price floor or price limit would prevent a market from adapting to its cost and quantity equilibrium, thus producing an inefficient result. But here's a little surprise. In addition to creating inefficiency, some consumer surplus will also be transferred to producers or some producer surplus to consumers.

Two shifts occur as a result of moving consumer surplus to suppliers (or producer surplus to consumers). Second, there is an inefficient result and a decrease in the overall surplus of society. The social surplus loss that occurs when the economy produces a deadweight loss at an inefficient quantity. In a very real sense, no one profits like money thrown away

7. In an attempt to manage the economy by direct intervention, national and local authorities often carry out price controls, which are statutory minimum or maximum prices on particular goods or services. There are two kinds of price checks: price peaks and price floors. A price limit is the maximum legal cost for a good or service, whereas the minimum legal price is a price floor. Although it is possible to enforce both a price ceiling and a price floor, the government usually chooses only a ceiling or floor for particular goods or services.

A price ceiling creates a shortage if the legal price is below the market equilibrium price, but if the legal price is above the market equilibrium price, it has no effect on the quantity supplied. A price ceiling below the price of the market balance creates a scarcity that causes consumers to compete aggressively for the limited supply. Supply is limited because suppliers don't get the prices they could earn a profit.

Price floors are sometimes referred to as price supports because they sustain a cost by keeping it from dropping below a certain amount. Most countries around the world have passed legislation to establish incentives for agricultural prices. Farm prices fluctuate— sometimes widespread— and thus farm incomes. So even if farm incomes are sufficient on average, they may be quite small for some years. Price incentives are aimed at preventing these swings.

8. Generally speaking, a quota of production is a cap on the amount produced. Milk quotas have often been imposed to monitor the growth of surplus production and budgetary spending, sustain market price support, and provide dairy farmers with price stability.
The economic theory of how quotas influence markets and, more precisely, demand, distribution of resources and welfare is well known. The welfare effects of quotas were usually compared to the free market situation with the traditional assumption that quota systems are ineffective and cause significant transfers from customers to producers

The quota system affects all aspects of output, affects structural changes in agriculture, the development of the dairy processing industry, the health of farmers and suppliers of inputs (to some degree consumers), the quality of resources in agriculture, the hazards of growth, the uptake of new technologies and, of course, the rate of production and trade.