Figure 1: Impact of price ceiling
Source: (Created by the Author)
Figure 1 shows the equilibrium in the property rental market in Prescott and the effect price ceiling on the market. From Figure 1 it is observable that supply curve (S) and demand curve (D) intersects with each other at point E, which is the initial equilibrium of the property rental market. At point E, equilibrium price is given by $20 and the equilibrium quantity is given by 40 units (Cook, 2017). However, the City Council has imposed a price ceiling at $16 which is below equilibrium price $20. With fall in price the demanded quantity increased as per law of demand to 56 units. Alternatively, due to fall in price to $16 the supplied quantity reduced to 32 units. Therefore, it is derived that after imposition of price ceiling at $16, there occurred a mismatch between demanded quantity and supplied quantity (Becker, Michael & Michael, 2017). It is found that, demanded quantity is greater than supplied quantity and thus market shortage occurred after imposition of the price ceiling. The amount of market shortage is (56 – 32) or 24 units.
Before imposition of price ceiling by the City Council in Prescott, the consumers were paying $20 per units of rental – housing. Under this situation the consumers were getting 40 units of rental – housing. Without presence of the price ceiling the consumer surplus is given by area 1 and 3 in Figure 1. The City Council is willing to lower the cost burden of the consumers of the rental – housing in Prescott. One way of lowering the cost burden of the consumers is to reduce the price/ rental of houses in the city (Marwala & Hurwitz, 2017). Therefore, the City Council with objectives of increasing the welfare of consumers and lowering their cost burden has imposed a price ceiling at $16 per units of rental – housing. Due to price ceiling the demanded quantity has increased but the supplied quantity has decreased. The demanded quantity increased to 56 units after imposition of price ceiling but as the supplied quantity declined to 32 units after price ceiling the consumers are not able to rent the number of houses they actually demanded at the reduced price $16. However, it is found that the consumers who are able to rent houses are getting at lower price. Hence, it can be said that owing to imposition of price ceiling some consumers are getting benefitted for low price but some got deprived as they are not getting any houses on rent due to market shortage (Hutchinson, 2017). Thus, the price ceiling affected the consumers in both positive and negative terms. As a result, the consumer surplus reduced by area 3 and increased by area 2 given in Figure 1. It can be observed from Figure 1 that area 2 is greater than area 3, it means that there is has been a net increase of consumer surplus after imposition of price ceiling by the City Council in Prescott. This rise in consumer surplus has not occurred due to improvement in the market but a part of producer surplus got transferred to the consumers. Apart from that, objective of the City Council to better off all the consumers in the rental – housing market in Prescott but after imposition of the price ceiling it is found that some consumers are better off at the cost of others. Thus, the price ceiling policy imposed by the City Council has not served the consumers well.
Price ceiling is a policy that sets price at the level above which a producer or seller is not allowed to charge any other price. It should be noted that in the given case of Prescott, the landlords were receiving the $20 per unit of rental – housing. Given the cost the landlords earn a certain profit per unit of rental – housing but imposition of price ceiling the maximum price that the landlords could charge reduced to $16. Therefore, it can be said that given the cost the profit of the landlords has declined by $4 per unit of rental – housing. Further, at this price the landlords are able to supply only 32 units of rental – housing (Dean et al., 2020). Hence, it can be said that the overall profitability of the landlords fell after the imposition of price ceiling. Again, as the landlords are not able to increase price to improve their profitability, the only way left to them to increase profit is to reduce cost. The cost per unit of rental – housing can be reduced by not maintaining the properties in case of existing ones and building properties with low quality material in case of new ones. Therefore, this way of cutting cost would eventually leads to fall in quality of rental – housing in Prescott. The houses would be less maintained and thus they would less comfortable and convenient to the consumers. Poor condition of houses means there is fall in level of satisfaction a consumer would get from renting a house would be much lower and thus the consumer would be worse off as quality of rental – houses fall after imposition of price ceiling.
The City Council in Prescott considered imposing price ceiling on apartment rentals but not on house rentals. This specific policy would hamper the market for house rentals. Price is inversely related to quantity demanded as per law of demand. The imposition of price ceiling would lower the apartment rentals compared to house rentals (Browning & Zupan, 2020). Apartments and houses are substitute to each other and thus fall in apartment rentals would lower the demand for houses on rent because consumers would prefer apartments due low rentals. It means that with imposition of price ceiling on the apartment rentals there would be a contraction in the market for houses and thereby the profitability of the market would fall due to specific price ceiling on apartment rentals. Therefore, it can be said that imposition of the said price ceiling has actually lowered the competitiveness of the house owners (Banerjee, 2021). Therefore, if the house owners want to compete with the apartment owners they need to lower their price which would again lower the profit. Thus, the owners of houses would prefer status quo over imposition of price ceiling on apartment rentals.
The recent articles that propose increase in minimum wage in the United States are as follows:
1) Name: Effects of increased minimum wages by unemployment rate on suicide in the USA
Authors: John A Kaufman, Leslie K Salas-Hernández, Kelli A Komro and Melvin D Livingston
Year: 2020
Published: J Epidemiol Community Health
2) Name: The Public Cost of a Low Federal Minimum Wage
Authors: Ken Jacobs, Ian Eve Perry, and Jenifer MacGillvary
Year: 2021
Published: UC Berkeley Center for Labor Research and Education
3) Name: Optimal Minimum Wage Setting in a Federal System
Authors: Andrew Simon and Matthew Wilson
Year: 2021
Figure 2: Impact of price floor
Source: (Created by the Author)
Minimum wage is based on the concept of price floor. The price floor is the level of price below which a producer cannot charge any price. It is generally set above the equilibrium price. Likewise, an employer cannot pay its employee below the minimum wage level. From the above articles it is found that the minimum wage should be increased. The reason behind increasing the minimum wage is to increase the purchasing power of the people in the country (Fryzek, Sanchez & Block, 2017). Additionally, it is found that minimum wage could lower income inequality and thus it has been suggested to increase minimum wage in the US. In Figure 2, labour market equilibrium occurs at the intersection point between the labour demand and labour supply curve which is shown as E in the figure (Harasztosi & Lindner. 2019). At this labour market equilibrium the wage is $20 and the numbers of people employed are 40. As per suggestion if the minimum wage in the US is increased to $24, then there would be rise supplied labour to 48 but the demanded labour declined to 24. Therefore, it can be said that there is rise in unemployment in the country by (48 – 24) or 24. It should be noted that due to imposition of minimum wage surplus of the employers reduced by area 2 and 3. It should be further noted that due to this rise in minimum wage there will be loss of social welfare which is given as area 3 and 4 (Manning, 2021). Further, people who gets job after minimum wage increase are better off but the unemployed are worse off in this case.
Before imposition of the minimum wage the surplus of the employers was given by the area 1, 2 and 3. After imposition of minimum wage the surplus of employers lost by the area 2 and 3. Due to this reason the employers got adversely affected as their cost of production increases. Considering the high amount of cost of the employers would replace labours with capital in order to lower their cost of production. Hence, it is thus observed from the figure that the employers lowered their hiring to 24 units. However, it is found that with rise in minimum wage the people are willing to work more in order to earn more and that is why the quantity supplied of labor increased. However, due to this rise in wager rate above the equilibrium wage rate the labours lost surplus given by area. When compared to area 2 in Figure 2, it is found that the area 4 is smaller than area 2. Therefore, it can be said that the labours benefitted from the imposition of minimum wage. Due to this reason the labours that are better off would put more efforts to remain in the job as there are others who have not received the job and are willing to get one. Thus, it can be said that after increase in minimum wage or imposition of price ceiling in the labour market the labours have become easily replaceable due to availability of large number of labours. Hence, it can be said that labours are putting more effort to be in job. In other words, it can be said that quality of work provided by the labours has increases due to the rise in in minimum wage and thus productivity of labours increased as well.
References
Banerjee, S. (2021). Intermediate microeconomics: A tool-building approach. Routledge.
Becker, G. S., Michael, G., & Michael, R. T. (2017). Economic theory. Routledge.
Browning, E. K., & Zupan, M. A. (2020). Microeconomics: Theory and applications. John Wiley & Sons.
Cook, P. J. (2017). The demand and supply of criminal opportunities (pp. 127-153). Routledge.
Dean, E., Elardo, J., Green, M., Wilson, B., & Berger, S. (2020). Price Ceilings and Price Floors. Principles of Economics: Scarcity and Social Provisioning (2nd Ed.).
Fryzek, N., Sanchez, J., & Block, W. E. (2017). The minimum wage law once again. The Review of Social and Economic Issues, 1(4).
Harasztosi, P., & Lindner, A. (2019). Who Pays for the minimum Wage?. American Economic Review, 109(8), 2693-2727.
Hutchinson, E. (2017). 4.5 Price Controls. Principles of Microeconomics.
Manning, A. (2021). The elusive employment effect of the minimum wage. Journal of Economic Perspectives, 35(1), 3-26.
Marwala, T., & Hurwitz, E. (2017). Supply and demand. In Artificial Intelligence and Economic Theory: Skynet in the Market (pp. 15-25). Springer, Cham.
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