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OSU ECON 4001.01 - Price Floor Application

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Econ 4001.01 1st Edition Lecture 15Outline of Last Lecture II. Firms Face Horizontal Demand CurvesIII. Choosing Outputa. In the Short-Runb. When the firm is making lossesIV. Short-Run Shutdown for Firms Making LossesV. Short- Run Supply Curve for Competitive FirmsVI. Short-Run Responses to Price ChangesVII. Producer SurplusOutline of Current Lecture VIII. Price Floor Applicationa. Minimum wageIX. Example: Government Support for AgricultureX. Impact of Taxes and SubsidiariesXI. SubsidiesCurrent Lecture- Price Floor Application- Minimum Wageo Minimum wage is an example of a price flooro Results: transfer of surplus from buyer of labor (firms) to the sellers of labor (workers) a market surplus (workers are unemployed) and dead weight losso Labor Demand Equation: LD=80-10wo Labor Supplied Equation: LS= 10wo W in 4/hour, L in millions of workerso What is equilibrium wage? What is initial labor demand and supply? $4 and 40 million workers Just set equations equal to each othero Suppose the government set a price floor at $5, what is the new demand and supply? LD= 30 million LS= 50 milliono What is the dead weight loss from this price floor?These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Calculate dead weight loss by rearranging the LD equation to equal w=8-(LD/10) Consumer surplus is ½(8-(LD/10)) $35 million loss in consumer surplus but $25 million benefitted by workers  so where did the other $10 million go? It is dead weight loss (DWL) DWL to employers is $5 million and to workers is also $5 million… Therefore total DWL is $10 million- Example: Government Support for Agricultureo Dilemma: Government wants to help farmerso BUT growing crops is perfectly competitive, with yields increasing, technological improvement, prices have been falling since 1918o Options considered: Price supports and quotaso With price supports there was a lot of surplus: so government changed this plano The better plan is to give subsidies- Impact of Taxes and Subsidiarieso Governments need to raise revenueo When they do it through a tax on market transactions (specific tax), equilibrium and surplus are affectedo Incidence of tax makes no difference on burdeno Burden depends on elasticity or supply and demando The most inelastic line (of supply or demand) bears most of the burden- Subsidieso Easiest to think of a subsidy as a negative


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