Overview
This lecture covers the concept of price floors, focusing on agricultural price supports and minimum wage, and analyzes their effects on markets and employment.
Price Floors: Definition and Examples
- A price floor is a government-imposed minimum price that can be charged for a good or service.
- Agricultural price supports are price floors set to prevent farm prices from falling too low, ensuring farmers stay in business.
- Minimum wage is a price floor for labor, setting the lowest legal wage employers can pay workers.
Minimum Wage and Labor Market Analysis
- In labor markets, firms are demanders (buyers of labor) and workers are suppliers (sellers of labor).
- Example: With an $8 equilibrium wage and 15,000 workers employed, a $14 minimum wage is imposed.
- At $14, demand for labor falls (employers hire fewer workers) and supply rises (more people want jobs), creating a surplus of labor (unemployment).
- Surplus in the labor market cannot be resolved by lowering wages due to the minimum wage law.
Realistic Effects of Minimum Wage Increases
- Textbook models may exaggerate job losses from minimum wage increases.
- In practice, firms often need a minimum number of workers to operate, so employment reductions are usually small.
- Higher minimum wages may attract some new workers, but the increase in labor supply is typically modest.
- Actual unemployment effects from minimum wage increases are generally smaller than basic models predict.
Preview of Related Concepts
- Future lectures will cover elasticity, which helps explain varying effects of price controls like minimum wage.
Key Terms & Definitions
- Price Floor — A legal minimum price set by the government for a good or service.
- Agricultural Price Support — Government intervention to keep farm prices above equilibrium.
- Minimum Wage — A legal minimum hourly wage that employers must pay workers.
- Surplus (Labor Market) — More people seeking jobs than there are positions available at the set minimum wage.
Action Items / Next Steps
- Listen to this week's podcast for a real-world example of agricultural price supports ("government cheese").
- Prepare for the next lecture on efficiency in supply and demand models and the impact of price controls.