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Applications of Demand and Supply Microeconomics

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Applications of Demand and Supply Microeconomics
MANAGERIAL ECONOMICS ASSIGNMENT

APPLICATIONS OF DEMAND AND SUPPLY

CONTENTS S. No. | Topic | Page Number | 1 | Price Floor | 3 | 2 | Price Ceiling | 9 | 3 | Rent Control | 12 | 4 | Taxing | 15 | 5 | OPEC Control Over Supply and Control | 20 | 6 | Can Good News For Farming Be Bad News For Farmers? | 24 | 7 | Drug Interdiction VS Drug Education | 26 | 8 | Short Answer Questions | 28 | 9 | Long Answer Questions | 30 | 10 | Multiple Choice Questions | 37 | 11 | Answer Key to Multiple Choice Questions | 41 |

1) Price Floor (Minimum wage regulation)
Fig 1.1Fig 1.2
Definition
The minimum amount of compensation an employee must receive for performing labor. Minimum wages are typically established by contract or legislation by the government. As such, it is illegal to pay an employee less than the minimum wage.

Explanation
The minimum wage attempts to protect employees from exploitation, allowing them to afford the basic necessities of life. The minimum wage rate fluctuates between countries, and sometimes between states or provinces.

Minimum wage : As an application of Theory of demand and supply.
Case 1: When there is no wage control.
i.e wage is given at the market price

Fig 1.3

In this case the wage is given at market price and Labour of ‘Lg’ meeting wages at ‘We’ .

Case 2: When minimum wage is fixed below the market determined wage

Fig 1.4
There will be no effect on wages or employment when minimum wage is set below market wage as employer setting minimum wage (Wm) would not meet their supply hence would have to increase wages to market wage (We).

Case 3: when minimum wage is above market wage
As we can see from graph below that when minimum wage is set above market wage then there will be unemployment of workers, especially low skilled workers , or there can be lower efficiency due to low skilled workers doing high skilled work.

Fig 1.5
Minimum wages have drawn strong criticism from many economists,
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