Unit 2 Written assignment Price ceilings/floors PDF

Preview

Summary

Gives explanations & examples of price ceilings and floors. ...

Description

Price Ceilings and Floors

“Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Price floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Price floors and price ceilings often lead to unintended consequences.” (1) During the present time of economic disparity, due in part to the worldwide health pandemic, businesses have been forced to cut back on goods and services produced. Many businesses, that primarily serve people in close or confined shared spaces, have been forced to close the business for lack of incoming revenue while the government tries to ‘flatten the curve’. Hotels, restaurants, gyms and even golf courses have laid off workers as collateral damages of the mandatory government quarantines. Lack of business does not reduce liabilities for the businesses or their employees. Workers still have families to feed, gas to buy, mortgages and utility bills that must be paid. Many utility and mortgage companies have extended grace periods to clients for the duration of the health crisis, offering deferments and refusing to cut utilities for nonpayment. There has been a demand that the minimum wage be increased. Let’s examine the potential impact, in my observation, an increase in the minimum wage would have on the US economy. I think it would have several positive impacts on the economy. First, it would spur the economy. More money in worker’s pockets means more money will be spent by that workforce. Secondly, employees will develop a sense of value and empowerment. Having a salary that seems to be more comparable to the increases in cost of living allows a feeling of added financial security. Many households would be able to rise just above the federal poverty line, thus reducing their dependency on low-income assistance programs, such as food stamps and medicaid health services. However, I feel that are several reasons the minimum wage hasn’t been changed, at the federal level.

When we look at the federal minimum wage increasing the price floor, we must also look forward to an increase in everything else in the economy. If “Happy Hamburger Joint” produces the Happy burger at a cost of $1.36, which includes the price for the burger patty and the man-hours to cook, dress and serve the customer and they sell it for $3.49. This gives the restaurant slightly over a 100% profit margin. The proposed minimum wage will immediately double the labor cost of each burger. In order to realize the same profits, the chain may raise the price of the burger. Imagine if this happens in every American industry: automobile, groceries, restaurant, theater, healthcare. Each industry would recoup that new wage through price increases. The inflation rate will rise in relation to the increase, also. Web based Economic Strategist, Investopedia, offers another way businesses may opt to strategize the new opportunity cost. “Another projected problem resulting from an increased minimum wage is that of potential job losses. Many economists and business executives who point out that labor is a major cost of doing business argue that businesses will be forced to cut jobs to maintain profitability. The 2019 CBO report estimates that raising the minimum wage to $15 an hour by 2025 would result in the loss of approximately 1.3 million jobs. The numbers could be substantially higher if companies made a major move toward outsourcing more jobs to less expensive labor markets outside the country. “(2) This model would negate the use of higher wages to improve a family’s economic status. Instead of rising above the poverty line. If jobs are lost the poverty level floor will rise to accommodate the newly displaced workforce. This will also make it meaningless to have specialized labor, unless these workers also receive an increase in the base pay for their specialized work. The entire wage increase proposal threatens the market economy symbolic of these United States. Likewise, local, stat and even national communities may also encounter some adverse consequences if price ceilings are instituted for apartment rentals. The conversation.com breaks it down: “Rent controls can come in many flavours but they are all a form of price ceiling to cap the level of rent that landlords can charge.”(3) They report that housing problems will come. “Shortages in quantity and quality will eventually occur, though their manner and degree depends very much on the particulars of

the rent control policy. Over time, though, the rental stock would decrease. From the beginning, regulated rentals will be under-maintained. Because landlords are poorly compensated for any improvements under rent control, they lack the incentive to upgrade or even perhaps make repairs.” In an effort to provide citizens with the right to live in an area free of unregulated price increases, rental boards may subject tenants to substandard, broken down apartments. This will eventually lead to people living in regulated ‘slums’, no better than residents that use subsidized government housing. These are my takes on possible changes to the US economy.

References 1. OpenStax College. (2016). Principles of economics. http://cnx.org/contents/[email protected] 2. https://www.investopedia.com/.../090516/what-are-pros-and-cons-raising-minimum-wage.asp 3. https://theconversation.com/explainer-what-are-rent-controls-and-who-benefits-from-them-56841...