Supply & Demand in action

1. Minimum
Prices
EdExcel
Economics
1.4.1

2. Minimum
Prices
in
Markets
• A
minimum
price
is
a
form
of
of
government
interven9on
• To
be
effec9ve,
a
minimum
price
must
be
set
above
the
normal
free-­‐market
equilibrium
• If
it
is
set
below,
then
it
will
have
no
impact
• In
some
cases
a
minimum
price
takes
the
form
of
a
guaranteed
minimum
price
at
which
the
government
or
a
purchasing
agency
will
buy
the
products
of
farmers
• Examples
including
price
support
schemes
in
the
EU
• China
has
recently
offered
a
generous
minimum
price
support
programme
for
their
coGon
farmers.
Under
the
scheme,
the
government
purchased
coGon
from
farmers
at
a
set
price,
building
up
a
massive
stockpile.
A
minimum
price
is
a
price
floor
for
a
market
–
suppliers
cannot
sell
the
product
legally
at
a
lower
price.

3. The
Debate
over
a
Minimum
Price
for
Alcohol
• Concerns
about
alcohol
fuelled
violence
and
the
public
health
problems
associated
with
excessive
drinking
have
fuelled
the
debate
over
alcohol
prices.
• In
2013
the
UK
government
abandoned
plans
to
introduce
a
minimum
unit
price
for
alcohol
of
45p
per
unit.
• Since
2014
there
has
been
ban
on
the
sale
of
alcohol
below
cost
price,
defined
as
the
level
of
alcohol
duty
plus
VAT.
• A
can
of
average
strength
lager
cannot
be
sold
for
less
than
40p
• A
standard
boGle
of
vodka
cannot
be
sold
for
less
than
£8.89.
Arguments
for
a
minimum
price
• Reduces
nega9ve
externali9es
from
heavy
alcohol
consump9on
• Pubs
may
benefit
from
higher
minimum
prices
in
supermarkets
• Can
target
cheaper,
high
strength
drinks
used
by
younger
drinkers
Arguments
against
a
minimum
price
• Minimum
price
is
a
tax
on
responsible
drinkers
• Producers
can
agree
voluntary
policies
on
alcohol
price
/
strength
• BeGer
to
raise
alcohol
du9es
which
will
raise
extra
tax
revenues

4. Minimum
Wage
Debate:
Lowest
Paid
Jobs
in
the
UK
253.6
257.6
259.3
267.8
268.4
272.7
278.7
279.9
285.2
285.5
0
50
100
150
200
250
300
Bar
staff
Waiters
and
waitresses
Launderers,
dry
cleaners
and
pressers
Hairdressers
and
barbers
Kitchen
and
catering
assistants
Leisure
and
theme
park
aGendants
Retail
cashiers
and
check-­‐out
operators
Other
elementary
services
occupa9ons
n.e.c.
Nursery
nurses
and
assistants
Cleaners
and
domes9cs
Median
full
9me
gross
weekly
pay
in
£s

5. Minimum
Wage
for
Adult
Workers
(Aged
+21)
5.93
6.08
6.19
6.31
6.5
0
1
2
3
4
5
6
7
2010
2011
2012
2013
2014
Wage
per
hour
in
£s
Update:
The
July
2015
budget
introduces
a
new
NaHonal
Living
Wage
for
workers
aged
25
and
above,
and
the
Low
Pay
Commission
will
set
out
how
it
will
reach
60%
of
median
earnings
by
2020.
This
means
that
the
Na9onal
Living
Wage
will
reach
the
government’s
target
of
over
£9
by
2020.

6. Minimum
Wage
Analysis
Diagram
A
minimum
wage
is
a
statutory
pay
floor
that
cannot
be
undercut
Value
of
the
UK
living
wage
versus
the
minimum
wage
2011-­‐2014
(£
per
hour)
Year Living
wage
Minimum
wage
2011 7.20 6.08
2012 7.45 6.19
2013 7.65 6.31
2014 7.85 6.50
Wage
Rate
Empl
E1
Labour
Demand
W1
Labour
Supply
MW
E2
E3
In
July
2014,
Germany
voted
to
introduce
a
minimum
wage
of
€8.50ph
for
the
first
9me

7. Minimum
Wage
Analysis
–
Importance
of
ElasHcity
Wage
Rate
Empl
E1
Labour
Demand
W1
Labour
Supply
MW
E2
E3
Wage
Rate
Empl
E1
Labour
Demand
W1
Labour
Supply
MW
E2
E3
Standard
minimum
wage
diagram
suggests
that
a
pay
floor
will
lead
to
a
contrac9on
of
employment.
But
this
depends
on
the
level
at
which
the
minimum
wage
is
set.
If
labour
demand
is
inelasHc,
then
a
higher
minimum
wage
will
cause
only
a
limited
contrac9on
on
the
level
of
labour
demand.

8. EvaluaHng
Arguments
for
a
Minimum
Wage
Case
for
a
higher
level
of
minimum
wage
in
the
UK
economy
Arguments
against
a
rise
in
the
naHonal
minimum
wage
• Equity
jusHficaHon:
Every
job
should
given
fair
pay
linked
with
skills/
experience
of
an
employee.
• Jobs:
Higher
minimum
wage
adds
to
the
costs
of
employing
workers
and
might
cause
higher
unemployment
• Poverty
reducHon:
A
minimum
wage
boosts
the
take-­‐home
pay
of
thousands
of
lower
paid
workers
• Small
businesses:
Many
smaller
businesses
struggle
to
make
a
profit
-­‐
risk
of
a
rise
in
business
closures
• Training:
It
encourages
firms
to
up-­‐
skill
their
workers
and
can
lead
to
higher
labour
produc9vity
• Training:
There
are
beGer
incen9ves
for
training
than
a
minimum
wage
e.g.
tax
relief
on
appren9ceships
• IncenHves:
Will
improve
incen9ves
for
people
to
look
for
paid
work
• CompeHHveness:
Might
make
many
UK
businesses
less
compe99ve
in
global
markets
• AnH-­‐discriminaHon:
A
way
of
tackling
discrimina9on
of
low-­‐paid
female
/
younger
workers
• InflaHon:
Higher
labour
costs
might
cause
higher
infla9on
which
then
lowers
real
incomes

9. Further
EvaluaHon:
AlternaHves
and
“It
Depends
On”
Policy
IntervenHon
AlternaHve
EvaluaHve
comment
Living
Wage
An
op9onal
alterna9ve
to
the
minimum
wage
–
a
growing
number
of
firms
are
signing
up
to
this
Income
Tax
Reforms
Cuhng
the
basic
rate
of
income
tax
or
liiing
the
tax
free
allowance
will
boost
work
incen9ves
Benefit
reforms
Linking
benefits
to
par9cipa9on
on
work
programmes
–
poli9cally
controversial
Measures
to
raise
labour
produc9vity
Most
important
in
long
run
–
higher
produc9vity
boosts
wages
/
incomes
The
effects
of
a
naHonal
minimum
wage
on
employment,
inflaHon
and
real
incomes
of
those
affected
depends
on..
Price
elas9city
of
demand
of
the
firms’
products
i.e.
can
they
pass
on
higher
costs
and
con9nue
to
sell
their
products
The
state
of
the
economy
i.e.
whether
firms
are
sufficiently
profitable
to
be
able
to
absorb
a
higher
minimum
wage
Whether
a
higher
minimum
wage
mo9vates
workers
to
improve
their
produc9vity
–
which
will
lower
unit
costs
Depends
on
the
magnitude
of
the
change
in
the
minimum
wage
and
the
9me
scale
over
which
it
happens

10. Minimum
Prices
EdExcel
Economics
1.4.1