Question

Discussion: Answer each section below in separate paragraphs.

A. From a purely economic point of view, should the government impose price floors on wages,
   otherwise known as a minimum wage? What are the pros and cons of doing so, and do the
   pros outweigh the cons or do the cons outweigh the pros? Explain.

B. Which of the following statements is true, and why? (Note that it is not a combination of both.
  Only one statement is true.)

1. Supply Creates Demand
   
2. Demand Creates Supply
   

     (Analysis Aid: Be sure you have a good understanding of the economic meaning of demand
                           and the economic meaning of supply before making your choice.)

C. If you were an employer, would you be more inclined to pay higher wages or lower wages for highly skilled laborers when the quantity supplied of such workers is in surplus? Why? What impact does the skill level of the workers have in this regard?

Answer 1

a)

Any kind of price ceiling distorts free market mechanism and increase the deadweight loss. It also keeps resources out of their best uses. the minimum wage increases unemployment and forces the producers to pay a wage above the value of the marginal product of the worker. The only party that gets the benefit is the low skilled workers who are employed and gets minimum wage. These workers see their income rising, however, the minimum wage increases production cost and increase prices. then the real wage of each worker decreases, making each one in the economy worse off than before. Hence, the minimum wage does not have any pros to their credit, only cons.

b)

According to classical economics, supply creates its own demand. But this thought comes crashing down in 1930s great depression. Then Keynes postulates his theory that prices and wages are not always flexible and hence, demand creates the supply. These statements are both true under some specific assumptions. However, in economy supply fails to create its demand and excess supply pile up inventories, then the firms cut back their production and decrease supply. When there is excess demand the firms always increase their production to meet the excess demand. Hence, the conclusion is that demand creates its own supply.

c)

if the quantity of highly skilled or any skilled worker is surplus at current market wage, clearly the market wage does not justify the productivity of these workers. The market value of productivity of all such worker is lower than the market wage rate. then as a consumer (the firm acts as a consumer in the labor market) tend to offer a lower wage for the highly skilled worker if there is excess supply. Productivity plays the role of determining the correct wage for these workers and help eliminate the excess supply from the market.