week 4 Ch05_PPT_Hubbard_Essen_2e.ppt

* * * Figure 5.7: The economic effect of a price floor in the wheat market. If wheat farmers convince the government to impose a price floor of $3.50 per bushel, the amount of wheat sold will fall from 2.0 billion bushels per year to 1.8 billion. If we assume that farmers produce 1.8 billion bushels, producer surplus then increases by orange square A—which is transferred from consumer surplus—and falls by yellow triangle C. Consumer surplus declines by orange square A plus yellow triangle B. There is a deadweight loss equal to yellow triangles B and C, representing the decline in economic efficiency due to the price floor. In reality, a price floor of $3.50 per bushel will cause farmers to expand their production from 2.0 billion to 2.2 billion bushels, resulting in a surplus of wheat equal to 0.4 billion bushels. * * * Figure 5.8: The economic effect of a rent ceiling. Without rent control, the equilibrium rent is $1500 per month. At that price, 2 000 000 apartments would be rented. If the government imposes a rent ceiling of $1000, the quantity of apartments supplied falls to 1 900 000, while the quantity of apartments demanded increases to 2 100 000, resulting in a shortage of 200 000 apartments. Producer surplus equal to the area of blue rectangle A is transferred from landlords to renters, and there is a deadweight loss equal to the areas of yellow triangles B and C. * The minimum wage is a controversial example of ‘price floor’. Supporters see the minimum wage as a way of raising the incomes of low-skilled workers. Opponents argue that it results in fewer jobs and imposes large costs on small businesses. The national minimum wage in Australia (in 2012) was $15.96 per hour for adults, with lower levels for workers under 21 years of age. The graphical analysis shows that as a result of minimum wage, the number of workers hired in the labour market is lower. Many economists favour alternative policies for helping low income earners such as tax credits. * * *