Class Thirty Four

I.                    Price floor:

Recall the rent control.

In the long run, not only you make houses less available, you actually make those poor people to get the house. It’s not even cheap for people who end up with the price you controlled.

*If curves become flatter (elastic), the problem got even worse.

There is a better to help the poor: give them wage subsidy.
This will not impair the market and people are free to use the money: not all of them will spend all the money in the houses; they may value other things more. So the clothes factories, for instance, may get profit and since now the house demand is really higher in a free market, it gives incentive to landlords to provide more houses with high quality.

i.                     labor market (the concept also applies.): Your productivity (determines your wage) is your ability to pick apples plus how much you value apples (how much society value). When there’s a price floor, like minimum wage floor, the quantity supplied exceed quantity demanded, you create a surplus (binding). It’ll be even worse when firm’s demand for labor is really elastic.

ii.                   Consequences :

(1) The law makes fewer people get the job (besides, the labor market demand is elastic, about 3, which means that a 1% increase of wage rate can result in 3% decrease in the number of workers hired) and make the existing workers harder to keep the job (because of the abundant existence of substitutes)
(2) Some workers just don't worth the new wage, it's a waste of cost.
(3) The cost has to come from somewhere. So may be the health care is gone, the vacations are gone, and the since the cost of productions are now higher, the price of the product can be higher. If you take the whole economy into consideration, a minimum wage law doesn't make any sense.
(4) The impact of minimum wage law is small.
(5) There's a better way other than the law. Give subsidy to producers. They will have freedom to hire workers, do researches or invest.
(6) Only a small portion of people live by minimum wage. Who earns the minimum wage? Basically no one makes minimum wage is poor! It’s not the people you aim! So a law intended to benefit only a small amount of people isn't good.

Rarity vs. Scarcity
Scarcity only implies that people want it more than it is available.  So the term is a relative term. People put strong value on oil, which is always abundant, so now oil is scarce despite its physical abundance. Things that are rare may not be scarce because people don't value it so much.

Surplus vs. Scarcity

Something is scarce only means we have to do trade-off to get it. Something surplus does not mean we don’t need to do trade-off. Surplus is a price phenomenon. It only tells you that prices are wrong.

Making things illegal:

The demand for drugs is really inelastic and you have some supply. Then we say that that drug is illegal to be bought and sold. Does that make your behavior go away? NO! Whose behavior is likely to change more when something is illegal? The suppliers: The supply curve tells you how the opportunity cost changes with the quantity of drug.  

i.                     Increase in elasticity (increasingly difficult to produce)

ii.                  Change the composition of producers.  Leaves more profitable opportunities for people currently engaged in drugs. People who have comparative advantage in illegal business enters.

iii.                  Drug dealers try to make more powerful drug (increase quality as same to increase quantity) since the probability of getting caught is the same.