Price controls and equilibrium

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Price controls and equilibrium

Q.1

In most cases political leaders set up prices of ‘essential’ commodities, in most cases agricultural, to make life affordable to all the people in the countries they lead. Sometimes they limit the price chargeable to a product creating price floors in the market. The economic market though is dictated by the laws of demand and supply. Market forces such as competition, price of other related and complementary products, among others affect these laws. If governments will impose a price floor that is above the equilibrium price existing in the market, the operation of the market is altered (Gwartney, et al, 2008). The alterations come about because of low level of purchases. This leads to a state where there is a reduced amount in the goods that are exchanged in the market and also decreasing the gains received from trade (Gwartney et al, 2008). Price floors have different economic consequences that range from low productivity to low levels of consumption. As most players will shy away from the market, the level of purchases would fall resulting into low money velocity, piling of stocks and low employment levels.

In most of the countries of the world, there are stipulated laws stating clearly the minimum wage a person can earn on a service he or she renders to an organization… These laws, some of which are enacted by acts of parliaments, are the minimum wage laws. This entails price floor strategy in the labor market. With the current global economic downturn, a lot of caution therefore has to be exercised in the policy making process due to the social, economic and political implications of such laws to the growth of a country towards self sustainability. Minimum wage is the least amount of money a worker can be paid hourly, daily, monthly or yearly after offering his or her services to an employer. These prices vary from country to country given the difference in their financial capabilities and resource endowment. However, most of them are working towards good living standards of their citizens by trying to regulate the financial relationships between employers and employees, and buyers and consumers. Specifically, the employers will find it hard to hire the labor. As such, the employers may reduce the rates of employment for the unskilled labor. As such, the market will have excess labor supply in the market as the employers would be legally required to meet the set wage rates.

Q.2

The removal of minimum wages has immediate impact of fall in labor price (wages). The fall in price would result into more demand by the employers. According to Gwartney, et al (2008) minimum wage and price floor is more or less the same thing. They argue that minimum wage makes the low skilled people in the labor force more expensive… From an economic point of view, the legalization of minimum wage translates to a high level of unemployment among these low –skilled laborers (Gwartney D. et al, 2008). However, in the absence of minimum wage and the respective laws, the equilibrium price of the same low skilled workers would be attainable at a very low rate. Their availability and the rate at which they are demanded would hit a balance at as low as five dollars (Gwartney et al, 2008). This means that most companies and organizations would opt for them since their financial plans would not be negatively affected. Depending on the quantity demanded, it means that most of them will be employed and in a matter of few days or months, they would be a rare commodity too. As such, demand would go up while the supply would fall in the labor market.

Q.3

Minimum wage to a certain degree is an important component of any economy. The tool can thus be used to enhance economic growth and enhancement of employment levels in certain sectors that depend on unskilled labor largely. If people’s minimum wages is increased, they will be able to afford more basic facilities that will improve their standards of living. Their children will attend good schools where quality education is given, access information equally with their counterparts who have the resources in abundance and the competition ground will be same for all of them. Furthermore, despite the environmental differences, the government is for all and elected by all. It is unethical fir a few people to enjoy a larger share of the national cake at the expense of a few poor people in the remote areas who in most cases do not have people to sincerely fight for their rights. According to MacKenzie (2006), minimum wage rates also enhance life quality in relation to the employees level of satisfaction that in the process improves the workers’ productivity.

Q.4

The minimum wage policy has not really been that effective in the fighting of poverty in the society. Despite the channeling of the extra money to help in poverty eradication by increasing the wages of the low skilled labor and helping those below the poverty line, most teenagers remain unemployed. Poverty on the other hand is not only an issue among the skilled and working class, it cuts across the personal economic level continuum. There needs to be a consideration of the population at large when these important policies are being made. Forums where youths can be empowered with basic skills that can help them get finances not only through formal employment nee to be created. Youth empowerment creates a generation of critical thinkers who can change their bright ideas into solutions to some of the real problems affecting the society. A major breakthrough to fighting poverty is by letting people get permanent jobs where they will be for some good time to gain experience and be trained leading to an increased productivity ( Vedder & Gallaway, 2001).

List of references

Gwartney D., Stroup L., Sobel S. & ., Macpherson D. (2008). Economics: Private and Public

Choice, Cengage Learning. 12th Ed.

MacKenzie, D. (2006). Mythology of the Minimum Wage

Vedder K& Gallaway E. (2001).Does The Minimum Wage Reduce Poverty. Retrieved

September 7, 2010, rom http://epionline.org/studies/vedder_06-2001.pdf.