Skip to main content

Chapter 6 HMWK

A few years ago there was a flurry of blog posts from economists on price controls and inflation in Venezuela.
How does this relate to the theories from the chapter? 
Now consider a different case.  After Hurricane Katrina and after Hurricane Sandy speculators brought in bottled water, but charged quite a lot for it.  What might have happened had price controls been imposed?  How might speculators have responded?  What would have happened to the quantity supplied of water? How about the quantity demanded? Where does the concept of fairness fit into this subject?
Last, choose an article about increases in the minimum wage and comment on it using the theories from this chapter in your comments. 


The first article about Venezuela illustrates how a price ceiling limits potential profits, which changes incentives for producers, resulting in a decrease in supply. Not only that, but consumers are more likely to hoard because the item is forced to sell at a price below equilibrium. The combined effect is that a shortage occurs because the supply is less than the demand. The market cannot correct itself unless the government lifts its policies.

The letter to the editor put it well, saying "By preventing prices from telling the truth about underlying conditions of supply and demand, such controls spread economic lies." This in turn causes people to behave in ways that do not align with reality and could potentially cause the problems to become worse.

The last article references hyperinflation, which is the phenomenon that occurs when the supply of paper currency is rapidly increased. As the supply increases, the currency loses its value, and it takes more to buy the same amount, which looks like rising prices.

------

As an inset article from the textbook describes on pages 84-85, "Allowing prices to rise at times of extreme demand discourages overconsumption". Although it seems like perhaps some kind of rationing program would increase equality, it would be rather inefficient in the face of a sudden and widespread natural disaster. Price controls would have an even worse outcome. If the sellers of bottled water could not make the profits they wish because the prices are kept artificially low, then it wouldn't be worth their while to supply the water. The reduced supply would be hoarded by whichever consumers could manage to buy it first. This would lead to an even more substantial shortage of water in a place that is already hurting. When the market is allowed to react naturally and prices reflect the conditions of supply and demand, a new equilibrium will emerge. This will result in the most equal distribution as people consider their purchases more carefully.

------

http://www.latimes.com/business/la-fi-minimum-wage-impacts-20160421-snap-htmlstory.html

This article covers some of the social impacts that would result from raising the minimum wage. It also asks questions like, "If policymakers blame high crime in cities such as Chicago on steep poverty and unemployment, Laffer asked, should they still advocate for a high minimum wage that might reduce jobs for the youth and exacerbate social problems?".

When the minimum wage increases, employers think twice about who they hire. Those who have the least amount of skills could be at an even larger disadvantage as they have to prove that they are worth more money. Employers would try to save money by hiring fewer workers, or reducing hours per worker, or reducing benefits. Some may even try to pay under the table, resulting in workers who are not protected for on-the-job injuries. None of these actions benefit society, so the perceived benefits of a wage increase are offset by the unintended consequences.

Comments

Post a Comment

Popular posts from this blog

Chapter 23 Reflection

I was glad to learn more about how interest rates affect the overall economy, as well as the cues that coincide with decisions to manipulate the interest rate. I ’m most interested in the arguments regarding government funded projects as well as a balanced government budget. On the one hand, I can see how money can trickle down from the government to the people when public projects are implemented. Construction jobs are sustained when bridges need to be built. However, it should be noted that this does not necessarily affect the job security within the industry itself. It’s great if businesses can win contracts, but what actually happens when the project is finished? How much has it actually changed the community itself, or has it just lined the pockets of a few? Also, how does the government decide which projects are most necessary? And in order to fund it, aren’t they raising taxes overall? It seems that when governments attempt to somehow increase public welfare by increasi...
Post a Comment
Read more

Chapter 22 Reflection

Inflation and unemployment have an inverse relationship. You can ’t have both become lower at the same time, but policymakers can decide acceptable threshold levels which will then inform which is more of a priority to pursue. It is good that people work at jobs, because then the GDP rises, which improves the nation’s economy as they become more efficient. But you see, a s more people get jobs, their income rises, and then their consumption also increases. Increased consumption means that prices generally rise as the goods go to the highest bidder. Workers in turn will demand higher wages in order to keep up with these rising prices, or inflation. So in the end, as unemployment decreases inflation will increase. I ’m not so sure that there really is a trade-off, as it seems to be more of a feedback cycle rather than something that can be legislated. And this feedback cycle seems to have a historic pattern as well. But overall, neither factor alone totally conveys the quality o...
Post a Comment
Read more

Chapter 20 reflection

This chapter talks about how the government's fiscal policy influences aggregate supply and aggregate demand regarding the money supply. The Fed sets the interest rate, and when they make a change it impacts the opportunity cost people face when deciding whether to spend or save money. This in turn affects how much money is supplied and demanded within the economy. The government can make choices about the purchases it makes or taxes it imposes, and this in turn affects many people's paychecks. Overall, it influences people's consumer spending. Pessimism and optimism can cause people to change their demand for money, and on a large scale certain repeated actions can trigger a recession or inflation. Both the Fed and the government use their policies to attempt to stabilize these fluctuations.
Post a Comment
Read more