Download Chapter 7_Price Floors & Minimum Wage

Interactive Examples
Price Floors / Minimum Wage
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Material from this presentation can be found in:
Chapter 3
Slides By
Eric Chiang and Kevin Brady
CoreEconomics, 2e
Interactive Examples
Price Floors / Minimum Wage
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At Clown Kingdom there is a labor
market for clowns as shown in the
diagram to the right. Wages for
clowns are measured on the vertical
axis, and the number of clowns is
measured on the horizontal axis.
Wage
Supply
$30
$25
$20
$15
Demand
20
30
40
50
60 Number
of Clowns
Interactive Examples
Price Floors / Minimum Wage
Wage
QUESTION ONE:
In this market, what is the
equilibrium wage for clowns
and the equilibrium number of
clowns hired?
Supply
$30
$25
$20
$15
Demand
20
Hint
30
40
50
60 Number
of Clowns
Answer
Interactive Examples
Price Floors / Minimum Wage
Hint:
The equilibrium wage and clowns hired occurs at
the wage and quantity where the demand and
supply curves intersect.
Interactive Examples
Price Floors / Minimum Wage
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Wage
QUESTION ONE:
In this market, what is the
equilibrium wage for clowns
and the equilibrium number of
clowns hired?
Answer: $20 and 40 clowns
Supply
$30
$25
$20
$15
Demand
20
30
40
50
60 Number
of Clowns
Interactive Examples
Price Floors / Minimum Wage
Wage
Supply
QUESTION TWO:
Suppose the Clown Union negotiates a
minimum wage of $25 for all clowns
working at Clown Kingdom. How will
the quantity demanded and quantity
supplied of clowns change? What is
the new quantity demanded and
quantity supplied of clowns at Clown
Kingdom?
$30
$25
$20
$15
Demand
20
Hint
30
40
50
60 Number
of Clowns
Answer
Interactive Examples
Price Floors / Minimum Wage
QUESTION TWO:
Hint:
First, determine whether the minimum wage is binding,
which occurs if the minimum wage is higher than the
equilibrium wage.
If so, then the new quantity
demanded and quantity supplied will occur where the
horizontal line representing the minimum wage
intersects the demand and supply curves, respectively.
Interactive Examples
Price Floors / Minimum Wage
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Wage
Supply
QUESTION TWO:
Suppose the Clown Union negotiates a
minimum wage of $25 for all clowns
working at Clown Kingdom. How will
the quantity demanded and quantity
supplied of clowns change? What is
the new quantity demanded and
quantity supplied of clowns at Clown
Kingdom?
Answer: At a higher wage of $25,
the quantity of clowns supplied
increases from 40 to 50, while the
quantity of clowns demanded
decreases from 40 to 30.
$30
Min
Wage
$25
$20
$15
Qty supplied
Qty demanded
20
Demand
30
40
50
60 Number
of Clowns
Interactive Examples
Price Floors / Minimum Wage
Wage
QUESTION THREE:
At the minimum wage of $25, how
many clowns will be hired? Is there a
shortage or surplus (or neither) of
clowns? Calculate this shortage or
surplus, if any.
Supply
$30
Min
Wage
$25
$20
$15
Demand
20
Hint
30
40
50
60 Number
of Clowns
Answer
Interactive Examples
Price Floors / Minimum Wage
QUESTION THREE:
Hint:
Hint:
First, determine whether the minimum wage is binding,
A shortage occurs if the quantity demanded exceeds
which occurs if the minimum wage is higher than the
quantity supplied at the minimum wage, while a surplus
equilibrium wage.
If so, then the new quantity
occurs if quantity supplied exceeds quantity demanded at
demanded and quantity supplied will occur where the
the minimum wage. If the minimum wage is below the
horizontal line representing the minimum wage
equilibrium wage, then the minimum wage is non-binding. If
intersects the demand and supply curves, respectively.
the minimum wage is above the equilibrium wage, the
number of clowns hired will equal the number demanded at
the minimum wage.
Interactive Examples
Price Floors / Minimum Wage
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Wage
QUESTION THREE:
At the minimum wage of $25, how
many clowns will be hired? Is there
a shortage or surplus (or neither) of
clowns? Calculate this shortage or
surplus, if any.
Answer: At $25, 30 clowns will be
demanded. A surplus of 20 clowns
will occur as the minimum wage is
above the equilibrium wage. This
surplus of 20 clowns represents
unemployment at Clown Kingdom.
Supply
$30
QS > QD
$25
Min
Wage
$20
$15
Demand
Surplus =
50 – 30 = 20
20
30
40
50
60 Number
of Clowns
Interactive Examples
Price Floors / Minimum Wage
QUESTION FOUR:
At the minimum wage of $25, calculate
the value of the deadweight loss
(unexploited gains from trade) created
by this higher wage.
Wage
Supply
$30
Min
Wage
$25
$20
$15
Demand
20
Hint
30
40
50
60 Number
of Clowns
Answer
Interactive Examples
Price Floors / Minimum Wage
QUESTION FOUR:
Hint:
Hint:
First, determine whether the minimum wage is binding,
The deadweight loss is the triangle area below the demand
which occurs if the minimum wage is higher than the
curve, above the supply curve, and between the equilibrium
equilibrium wage.
If so, then the new quantity
wage and the quantity demanded at the minimum wage.
demanded and quantity supplied will occur where the
The formula for the area of a triangle is ½ x base x height.
horizontal line representing the minimum wage
intersects the demand and supply curves, respectively.
Interactive Examples
Price Floors / Minimum Wage
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QUESTION FOUR:
At the minimum wage of $25, calculate
the value of the deadweight loss
(unexploited gains from trade) created
by this higher wage.
Wage
Supply
Deadweight Loss =
$30
½ x (40 – 30) x
($25 – $15) = $50
Min
Wage
$25
At a minimum wage of $25, only 30 clowns
will be hired. A deadweight loss occurs
because there are 10 clowns that would be
willing to work for less than $25 but
cannot find work because of the minimum
wage, creating unexploited gains from
trade (or deadweight loss). The value of
this deadweight loss is: ½ x (40 – 30) x
($25 – $15) = $50 (for every hour that these
10 un-hired clowns would have worked if
the minimum wage was not in effect).
$20
$15
Demand
20
30
40
50
60 Number
of Clowns
Interactive Examples
Price Floors / Minimum Wage
QUESTION FIVE:
Suppose that due to a freak accident where 20 clowns
attempted to pack into a compact car, got stuck and
subsequently suffocated, thus drastically reducing the
supply of clowns by 20 at every wage. Shift the supply
curve accordingly. How does this shift impact the
equilibrium wage and number of clowns in this
market? What happens to the impact of the minimum
wage?
Wage
Supply
$30
Min
Wage
$25
$20
$15
Demand
20
Hint
30
40
50
60 Number
of Clowns
Answer
Interactive Examples
Price Floors / Minimum Wage
Hint:
Hint:
First, determine whether the minimum wage is binding,
Shift the supply curve so that at every wage, there are 20
which occurs if the minimum wage is higher than the
fewer clowns being supplied. Determine the new
equilibrium wage.
If so, then the new quantity
equilibrium wage and quantity of clowns by the intersection
demanded and quantity supplied will occur where the
of the new supply curve and the existing demand curve.
horizontal line representing the minimum wage
Determine whether the minimum wage is above, equal, or
intersects the demand and supply curves, respectively.
below the new equilibrium wage. If the minimum wage is
equal to or below the equilibrium, it would no longer be
binding.
Interactive Examples
Price Floors / Minimum Wage
QUESTION FIVE:
Suppose that due to a freak accident where 20 clowns
attempted to pack into a compact car, got stuck and
subsequently suffocated, thus drastically reducing the
supply of clowns by 20 at every wage. Shift the supply
curve accordingly. How does this shift impact the
equilibrium wage and number of clowns in this
market? What happens to the impact of the minimum
wage?
ANSWER:
If 20 clowns are removed from the supply curve
at every wage, the supply curve would shift left
by exactly 20 clowns. The new equilibrium wage
would be $25 and the new equilibrium number of
clowns would be 30. At this new equilibrium, the
minimum wage of $25 is no longer binding, since
the equilibrium wage of $25 equals the minimum
wage. Thus, the market equilibrium will prevail.
New
Supply
Wage
Old
Supply
$30
Min
Wage
$25
$20
Min wage no
longer binding
$15
Demand
20
30
40
50
60 Number
of Clowns
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