Microeconomics: Markets Seek Equilibrium And The Demand

Microeconomics1 Markets Seek Equilibrium And The Demand For Goods A

Microeconomics 1. Markets seek equilibrium, and the demand for goods and services will come to an equilibrium with supply of goods and services. When markets are not in equilibrium, surpluses and shortages, as well as underground markets, can exist. Sometimes, the government may want to intervene in markets to try to help reduce economic hardships. Analyze the impact of an increase in the minimum wage from the current level to $15 per hour.

How would the following be affected? a. employment of people previously earning less than $15 per hour b. the unemployment rate of teenagers c. the availability of on-the-job training for low-skilled workers d. the demand for high-skilled workers who are good substitutes for low-skilled workers Review the mechanics of price floors and price ceilings. Why does a price floor lead to surpluses? Why does a price ceiling lead to shortages? Review consumer and producer surplus. A price floor will lead to a transfer of consumer surplus to producer surplus; a price ceiling will lead to a transfer of producer surplus to consumer surplus; both price regulations lead to deadweight losses, which is a loss of surplus to society. Why?

2. Politicians have a strong incentive to follow a strategy that will enhance their chances of getting elected and re-elected. Political competition more or less forces them to focus on how their actions influence their support among voters and political contributors. What is market failure, and what kinds of things can lead to market failure? What is government failure? Can government failure lead to market failure? Review concepts like shortsightedness and rent seeking. What are the effects of government intervention in markets with some of the price regulations like price floors and price ceilings we discussed in chapter 4?

3. Recent research confirms that the demand for cigarettes is not only price inelastic, but it also indicates smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes. How can the income and substitution effects of a price change help explain this? Review price elasticity of demand and supply. Price elasticity describes the sensitivity between quantity demanded/supplied and price when a change in price occurs. A relatively lower change in quantity versus a change in price means the product is more price inelastic; a higher relative change in quantity versus a price change indicates more price elastic. Review the substitution effect and income effect dynamics.

4. To maximize profit, a price taker will expand its output as long as the sale of additional units adds more to revenues (marginal revenues) than to costs (marginal costs). Therefore, the profit-maximizing price taker will produce the output level at which marginal revenue (and price) equals marginal cost. In a price-taker market, if a business produces efficiently (i.e., that is, where marginal revenues = marginal costs), the firm will be able to make at least a normal profit. True of False. Explain. All firms produce where MR=MC. Price takers produce and price where P=ATC=MC=MR. That is the "normal profit" level. Profits above that level are considered "economic profits." Review economic profits, normal profits, explicit costs, and implicit costs.

5. A profit-maximizing price searcher will expand output as long as marginal revenue either exceeds or is equal to marginal cost, lowering its price or raising its price until the midpoint of their demand curve and highest total revenues are achieved. Why are oligopolies able to earn both short-run economic profits and long-run economic profits, while price taking firms like perfect competitors can only earn short-run economic profits? Review the characteristics of perfect competition and imperfect competition (monopolistic competition, oligopoly, and monopoly). Barriers to entry don't exist for perfect competition, but barriers to entry exist for imperfect competition. What are the implications of barriers to entry to the firm and competition? Review consumer surplus and producer surplus; what happens to consumer surplus if price is above equilibrium, or in this case above normal profits?

6. Profit-maximizing firms will hire additional units of a resource up to the point at which the marginal revenue product (MRP) of the resource equals its price. With multiple inputs, firms will expand their use of each until the marginal product divided by the price (MP/P) is equal across all inputs. What is the link between marginal revenue product and wages? Due to discrepancies between the productivity and resource offerings (i.e., education, skills, experience) in labor markets, is it justified for one employee with a higher marginal revenue product to earn a higher wage than an employee with a lower marginal revenue product? Does this notion of marginal revenue product and wages conflict with minimum wage laws? Review the mechanics of demand and supply. How does marginality work in economics?

7. Imports increase the domestic supply and lead to lower prices for consumers. Exports reduce the domestic supply and push price upward. The net effect of international trade is an expansion in total output and higher income levels for both trading partners (law of comparative advantages). "Imports destroy jobs; exports create them. The average American is hurt by imports and helped by exports." Do you agree or disagree with this statement? Explain and support. Review absolute and comparative advantages. Personal private property protection allows for greater entrepreneurial ventures, and thus an expanding economy and job growth; can import tariffs and quotas reduce the benefits of trade? Review the mechanics of import tariffs and quotas and world price.

Paper For Above instruction

Increasing the minimum wage to $15 per hour has profound implications for various facets of the labor market and economic dynamics. This policy intervention aims to favor low-wage workers, but it also triggers complex market responses rooted in the fundamental principles of supply and demand, market equilibrium, and government regulation. Analyzing these effects requires understanding both theoretical frameworks and empirical evidence regarding labor market behavior.

Firstly, the employment of individuals previously earning less than $15 per hour is generally expected to decline when the minimum wage rises. According to classical economic theory, setting a price floor above the equilibrium wage creates a surplus of labor—meaning more workers are willing to work at the higher wage than employers are willing to hire. Empirical studies such as those by Neumark and Wascher (2007) support this, indicating that a mandatory increase in minimum wages can lead to reduced employment opportunities for low-skilled workers due to increased labor costs. This effect is particularly pronounced for teenage workers and youth, who typically have less experience and weaker bargaining power. As a consequence, teenage unemployment rates tend to rise following minimum wage hikes, a trend corroborated by multiple research analyses (Card & Krueger, 1994).

Regarding the availability of on-the-job training for low-skilled workers, higher wages could incentivize employers to invest in training programs that enhance worker productivity, thus offsetting the higher wage costs. Conversely, some firms may reduce training or cut back on hiring altogether, given the increased economic burden. The demand for high-skilled workers might also increase, as firms substitute low-skilled labor with specialized skills that can justify the higher wage expense through productivity gains. Evidence from industry reports suggests that a higher minimum wage could shift labor demand toward more skilled and productive workers (Dube, 2019).

Understanding the mechanics of price floors and ceilings reveals that a price floor (like a minimum wage) leads to surpluses because it sets a minimum price above the equilibrium, resulting in quantity supplied exceeding quantity demanded. This excess supply of labor manifests as unemployment. Conversely, price ceilings prevent prices from rising to equilibrium levels, leading to shortages where demand outstrips supply, as seen with rent controls or other regulated prices. Both forms of price regulation create deadweight losses: a price floor transfers surplus from consumers to producers but also causes unemployment and inefficiencies, while a price ceiling benefits consumers temporarily but reduces producer surplus and leads to shortages (Mankiw, 2014).

From a welfare perspective, consumer surplus diminishes under a price floor because consumers pay higher wages and find fewer opportunities, whereas producer surplus increases due to higher wages received by workers and higher prices for labor. However, deadweight losses signify the loss of societal welfare, demonstrating that government interventions have trade-offs. These interventions distort natural market signals, often leading to inefficiencies and unintended consequences (Samuelson & Nordhaus, 2010).

Market failure occurs when resources are not allocated efficiently, often due to externalities, public goods, information asymmetries, or market power. Politicians may contribute to market failure through actions driven by shortsightedness or rent-seeking behavior, seeking benefits for specific groups at society's expense (Baumol & Blinder, 2007). Government failure, resulting from bureaucratic inefficiencies, regulatory capture, or incentive misalignment, can exacerbate market imperfections. For instance, poorly designed price controls may lead to shortages or surpluses, creating deadweight loss, and sometimes unintended economic distortions (Tirole, 2010).

Research on cigarette demand reveals that low-income smokers respond more strongly to price increases than higher-income smokers, due to the income and substitution effects. Lower-income individuals experience a higher marginal utility of income, making price hikes more impactful—potentially leading them to reduce consumption disproportionately. The price elasticity of demand captures this sensitivity, with more elastic demand indicating larger changes in quantity with price variations. Hence, the income effect (reducing consumption due to higher prices) is more pronounced among lower-income groups, aligning with economic theories of elasticity and consumer behavior (Cawley et al., 2016).

In perfect competition, firms maximize profits by producing where marginal revenue equals marginal cost (MR=MC). This condition ensures no further profit can be gained by altering output levels. Complete efficiency is achieved when price equals both marginal cost and the average total cost (P=MC=ATC), yielding normal profits—covering explicit and implicit costs. This equilibrium reflects the optimal resource allocation without unnecessary surplus or shortages (Varian, 2014). Any profits above this level are termed economic profits, attracting new entrants or innovations that might erode such profits over time in a perfectly competitive market.

Oligopolies, characterized by few firms and significant barriers to entry, can sustain both short-run and long-run economic profits. Unlike perfect competition, where profit tends to diminish in the long run due to free entry, oligopolies can maintain profits through strategic barriers, product differentiation, and market power. Their ability to influence prices and output levels enables sustained gains, leading to higher consumer prices and reduced consumer surplus. Market structures with barriers prevent new competitors from entering, thus preserving profits and enabling price-setting power (Bain, 1956). Consequently, consumer surplus diminishes as prices move above competitive levels.

Resource allocation in labor markets hinges on the marginal revenue product (MRP), which links productivity to wages. Firms hire until the MRP of a resource equals its price, aligning wages with productivity levels. Higher productivity الموظف with a higher marginal revenue product justifies earning a higher wage, respecting the principle that wages reflect marginal contributions. Discrepancies arise when skills or education differences cause income disparities, which are justified by productivity variations. However, minimum wage laws may introduce conflicts if legally mandated wages exceed marginal productivity, potentially leading to unemployment or reduced employment opportunities (Borjas, 2013).

International trade generally leads to increased total output and higher incomes due to comparative advantage—each country specializing in goods where they have relative efficiency. While imports lower domestic prices and can cause job displacement in certain sectors, they also provide benefits such as lower consumer prices and access to diverse goods. Conversely, exports expand domestic employment and production. The assertion that "imports destroy jobs; exports create them" oversimplifies economic complexities. Empirical evidence suggests that trade creates both winners and losers, with overall gains in economic welfare when balanced by efficient labor reallocation. Trade policies like tariffs and quotas distort these benefits by raising prices and reducing efficiency, potentially leading to a decline in overall welfare (Krugman et al., 2015).

References

• Bain, J. S. (1956). Barriers to New Competition. Harvard University Press.
• Borjas, G. J. (2013). Immigration Economics (Third Edition). Harvard University Press.
• Card, D., & Krueger, A. B. (1994). Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. American Economic Review, 84(4), 772-793. https://doi.org/10.1257/aer.84.4.772
• Cawley, J., Fong, G. T., & Lovenheim, M. (2016). Cigarette Price Increases and Consumption Among Low-Income Smokers. Journal of Health Economics, 50, 86-101. https://doi.org/10.1016/j.jhealeco.2016.09.001
• Dube, A. (2019). Minimum Wages. IZA World of Labor. https://wol.iza.org/articles/minimum-wages/long
• Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2015). International Economics: Theory and Policy (10th ed.). Pearson Education.
• Mankiw, N. G. (2014). Principles of Economics (7th Edition). Cengage Learning.
• Neumark, D., & Wascher, W. (2007). Minimum Wages and Employment. Foundations and Trends® in Microeconomics, 3(1–2), 1–182. https://doi.org/10.1561/0700000015
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th Edition). McGraw-Hill Education.
• Tirole, J. (2010). The Theory of Industrial Organization. MIT Press.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.