Lecture Notes: Price Floors and Their Effects - Part 1
Introduction to Price Floors
- Definition: A price floor is a minimum price set by law, below which it is illegal to buy or sell.
- Key Point: Price floors prevent prices from falling below a certain level.
- Examples: Minimum wage is a well-known example of a price floor.
Commonality of Price Floors vs. Price Ceilings
- Price floors are less common than price ceilings.
- Political Reasons: More consumers than producers; holding prices above market price seems to harm more people.
- Exception: Minimum wage benefits more sellers (workers) than buyers (employers).
Effects of Price Floors
Price floors lead to four significant effects:
- Surpluses
- Lost Gains from Trade
- Wasteful Increases in Quality
- Misallocation of Resources
Focus on Surpluses
- Surplus Definition: Occurs when quantity supplied exceeds quantity demanded due to a price floor.
- Example: Minimum wage leads to a surplus of labor, known as unemployment.
- Affected Workers: Primarily impacts low-skilled, inexperienced workers, such as teenagers.
Minimum Wage as a Price Floor
- Impact: Can create unemployment, especially among least skilled workers.
- Diagram Analysis:
- Quantity of labor demanded less than quantity supplied at minimum wage.
- Surplus of labor (unemployment) results.
Unemployment and Minimum Wage
- Modest Increase:
- Effects may not be substantial but benefits are also limited.
- Most workers earn above the minimum wage.
- Large Increase:
- Likely to cause significant unemployment.
- Historical Example: Puerto Rico in 1938 faced severe unemployment due to a large minimum wage relative to local wages.
- International Comparisons:
- Higher minimum wages in countries like France contribute to high youth unemployment.
Lost Gains from Trade
- Explanation:
- Some workers willing to work for less than minimum wage.
- Some employers willing to hire below minimum wage.
- Mutually beneficial trades are illegal, causing deadweight loss.
Conclusion
- Covered: Surpluses and lost gains from trade as effects of price floors.
- Next Lecture: Discussion on wasteful increases in quality and resource misallocation.
Additional Resources
- Practice questions available for self-testing.
- Option to proceed to next video for further learning.