Price Dynamics

By: Mike Cumberland

Case Study, Module Two

BUS 305: Competitive Analysis and Business Cycles

TUI UNIVERSITY

Dr. Danielle Babb

30 July, 2010

INTRODUCTION
This case study will analyze certain aspects of supply and demand principals as related to economic terms. First, we will discover what the market consequences are of a price floor. We will focus on minimum wage laws and there implementation and economic consequences. Next we will discover what the laws of supply and demand predict would be the result of an immediate removal of minimum wage in terms of the price of labor and the quantity available. We will next identify whether or not the minimum wage should be raised in order to provide workers with a better standard of living. We will also discover whether or not the minimum wage law is an effective poverty-fighting measure. Finally, we will try to outline at least one alternative policy. Let’s look at the first item now.
PRICE FLOORS
In economic terms, setting a price floor can have a wide range of impact on a society. In the economic model, it most notably creates a Qs>Qd and thus a surplus. It tends to be set above equilibrium. An example of this is the minimum wage law. It is a form of price control. When the floor is raised it forces employers to make tough economic choices and possibly terminate employment for workers. Studies have shown this especially hurts the minority sectors of the economy. MacKenzie pointed out that, “Real statistics indicate that the critics of minimum wage laws were right all along. While it is true that minimum wages do not drive the national unemployment rate up to astronomical levels, it does adversely affect teenagers and ethnic minorities” (MacKenzie, 2006). The concept is heart driven but logic void. Even when presented with empirical data, proponents push for the price floor. Instituting a minimum wage allows the employer to justify a lower wage than someone is actually worth and ultimately keeps capital in the hands of the employer rather than the mass of consumers. What if we removed it?
REMOVAL OF A MINIMUM WAGE
Imagine if the minimum wage was removed. Would we ever actually reach equilibrium? I seriously doubt it. When speaking of wages and workers, the supply of workers always exceeds the demand of the employer. We have never actually reached 100% employment in the United States. Unless we experienced a terrible plague or dramatic drop in the birth rate, low income employees will exceed low income jobs. So, Qs>Qd would still be in place. Ultimately it would increase wages. Employers don’t need just bodies; they require some of the folks to be smart enough to handle some of the more complex day to day activities. Prior to the floor removal, everyone got paid the same and employers could justify a standard salary. Now that the floor was removed, people would seek out higher pay based on their talent. Employers would have to offer incentives and drive wages up. The less talented would continue to earn a lower wage but not work for free. We are not in the days of Jimmy Hoffa and the Teamsters. Business leaders have definitely evolved. This brings us to the next question. Shouldn’t we just raise the wage to bring workers out of the poverty roles?
RAISING THE BAR
How much is too much? How much is not enough? I fail to believe that the minimum wage should be a living wage. If it was, there would be very little motivation to ever get out of the bottom earning bracket and self elevate. The kinds of jobs that pay minimum wage are designed for folks with very little skill and very little education. Students, people in between jobs and several other types of people such as previous convicts are also frequent employees of the low paying jobs available to the workforce. Do we need to raise the wage to provide a better standard of living? No. That is up to the individual. Student loans,