ECON111 Microeconomic Principles

ECON111 Microeconomic Principles

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ECON111 Microeconomic Principles

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ECON111 Microeconomic Principles

1 Download7 Pages / 1,585 Words

Course Code: ECON111
University: Macquarie University

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: Australia

Question:

Q1. From the perspective of economic theory, what is a minimum wage and when is it binding?
Q2. According to the Fair Work Commission’s National Minimum Wage Order for 2018 (available on it’s website), what is the national minimum wage per hour in Australia for an adult worker?
The following information will be used for the remaining 10 questions. Assume that the market for unskilled labour in Australia is a competitive market and can be described by the following demand and supply curves:
Q3. Calculate the equilibrium wage rate and quantity of unskilled labour employed. Draw a diagram to illustrate your answer.
Q 4. Show on your diagram and calculate the size of the:
(i) Consumer/firm surplus
(ii) Producer/worker surplus
(iii) Total Surplus
Q5. Suppose that the Fair Work Commission imposes a minimum wage of $19 per hour.
(i) How many hours of employment are exchanged in the market?
(ii) Calculate the size of the surplus or shortage of hours created by the imposition of the minimum wage.
Q6. Based on your re-calculations in Q8, do your conclusions reported in Q7 change?
Q7. Consider your responses in Q7 and Q9. From a consequentialist perspective that has as its objective allocative efficiency, is the introduction of a minimum wage ethically justified? Explain.
Q8. Consider your responses in Q7 and Q9. From a consequentialist perspective that has as its objective improving the standard of living of unskilled workers, is the introduction of a minimum wage ethically justified? Explain.
Q9.From a deontological ethical framework, construct an argument either in favour of a minimum wage or against it.

Answer:

Minimum wage falls under the category of price control known as a price floor. This type of price floor stipulates the lowest wages an employee can receive as compensation for labor provided (Case et al., 2014, p.54). Therefore, the enactment of minimum wage legislation is meant to protect the interest of workers so that the employers do not exploit them. For minimum wage to bind, it must be set above the market equilibrium wage rate. If it set below the market equilibrium, it will be ineffective and will not influence the market due to the price mechanism.
Australia’s minimum wage rate is 18.93 dollars per hour (Fair Work Ombudsman, 2018).
At equilibrium, Quantity supplied (Qs) equals the Quantity demanded (Qd)
Qd = 1,500,000 – 60,000W
QS = 120,000W – 1,200,000
1,500,000 – 60,000W = 120,000W – 1,200,000
Collect the like terms together
-60,000W – 120,000W = – 1,200,000 – 1,500,000
-180,000W = -2,700,000
W = -2,700,000 / -180,000
W = 15
Equilibrium wage rate = $15 per hour
Substitute 15 in any of the equations to obtain equilibrium quantity of labor.
Qd = 1,500,000 – 60,000W
W = 15
Therefore,
Qd = 1,500,000 – 60,000(15)
Qd = 1,500,000 – 900,000
Q = 600,000
Equilibrium quantity = 600,000 hours
We will choose values of wage rate and calculate Qs and Qd at each value and then graph the results in excel.

Wage rate per hour

10

15

20

25

Hours of labour supplied.

0

600,000

1,200,000

1,800,000

Hours of labour demanded

900,000

600,000

300,000

0

Consumer surplus is shown by the area shaded orange. This surplus is given as the area below the demand curve and above the market clearing wage rate.
Mathematically, consumer surplus is given as ½ base * height
Base = 600,000
Height = 25 – 15 = 10
Hence
Consumer surplus = ½ * 600,000 * 10 = $3,000,000
Producer surplus is depicted by the area shaded green. This surplus is given as the area above the supply curve and below the market clearing wage rate.
Producer surplus = ½ base * height
Base = 600,000
Height = 15 – 10 = 5
Producer surplus = ½ * 600,000 * 5 = $1,500,000
Producer surplus = $1,500,000
Total surplus = Consumer surplus + Producer surplus
Consumer surplus = $3,000,000
Producer surplus = $1,500,000
Therefore,
Total surplus = $3,000,000 + $1,500,000 = $4,500,000
Hours of employed = to the number of hours demande
The demand curve was given as Qd = 1,500,000 – 60,000W. We will, therefore, find the value of Qd.
Minimum wage rate per hour = 19
Therefore,
Qd = 1,500,000 – 60,000(19)
Qd = 1,500,000 – 1,140,000
Qd = 360,000 hours
The number of hours employed or demanded by firms is 360,000.
To determine whether there is a shortage or a surplus, we will find the difference between the numbers of hours demanded and number of hours supplied as a minimum wage rate of 19 dollars per hour.
Number of hours demanded
Qd = 1,500,000 – 60,000W
Qd = 1,500,000 – 60,000(19)
Qd = 1,500,000 – 1,140,000
Qd = 360,000 hours
Number of hours supplied
QS = 120,000W – 1,200,000
QS = 120,000(19) – 1,200,000
Qs = 1,080,000 hours
From the calculations above, it is evident that the number of hours demanded are lower that the number of hours supplied. Hence, the introduction of minimum wage results in surplus in the market as workers are will to supply more hours at a higher wage rate.
Surplus = 1,080,000 – 360,000 = 720,000 hours.
Consumer or firm surplus is depicted by region painted orange. To find consumer surplus, we will calculate the area of this region.
Area = ½ base * height
Base = 360,000
Height = 25 – 19 = 6
Therefore,
Consumer surplus = ½ * 360,000 * 6 = $1,080,000
Worker or producer surplus is depicted by region painted green. Find the area of this region.
Area = ½ base * height
Base = 360,000
Height = 13 – 10 = 3
Producer surplus = ½ * 360,000 * 3 = $540,000
Total surplus = Consumer surplus + Producer surplus
Consumer surplus = $1,080,000
Producer surplus = $540,000
Therefore,
Total surplus = $1,080,000 + $540,000 = $1,620,000
Resources lost in job search are depicted by the area shaded black
Area = length * width
Length = 360,000
Width = 19 – 13 = 6
Area of rectangle = 360,000 * 6 = $2,160,000
Deadweight loss is given by area shaded red.
Deadweight loss = ½ base * height
Base = 600,000 – 360,000 = 240,000
Note: we will find the heights of the two triangles to calculate their areas.
The upper triangle = 19 – 15 = 4
The lower triangle = 15 – 13 = 2
Therefore,
Deadweight loss = (½ * 240,000 * 4) + (½ * 240,000 * 2)
Deadweight loss = 480,000 + 240,000 = $720,000.
Deadweight loss = $720,000.
The introduction of the minimum wage rate has made the consumers or firms worse due to a decline in their surplus. This legislation has diminished the welfare of consumers by 1,920,000 dollars, that is, from $3,000,000 to $1,080,000.
The workers or producers are worse off since their surplus has also decreased considerably. The benefit that the producers receive for participating in this market has reduced by 960,000 dollars, that is, from $1,500,000 to $540,000.
The decrease in consumer surplus and workers or producer surplus is enough indication that the welfare of the society has also been impacted adversely. The minimum wage has diminished by surplus of the society by 2,880,000 dollars, that is, from $4,500,000 to $1,620,000.
Consumer surplus is given as ½ * base * height
Base = 360,000
Height = 25 – 19 = 6
Therefore,
Consumer surplus = ½ * 360,000 * 6 = $1,080,000
Producer surplus is given as {½ * base * height} + {length * width}, that is, the area of the triangle and rectangle.
Base = 360,000
Height = 13 – 10 = 3
Therefore,
Producer surplus = (½ * 360,000 * 3) + (360,000 * 6) = $2,700,000.
Total surplus is given as Consumer surplus + Producer surplus
Consumer surplus = $1,080,000
Producer surplus = $2,700,000.
Therefore,
Total surplus = $1,080,000 + $2,700,000 = $3,780,000.
Deadweight loss is given as ½ base * height
Base = 600,000 – 360,000 = 240,000
Note: we will find the heights of the two triangles to calculate their areas.
The upper triangle = 19 – 15 = 4
The lower triangle = 15 – 13 = 2
Therefore,
Deadweight loss = {½ * 240,000 * 4} + {½ * 240,000 * 2}
Deadweight loss = 480,000 + 240,000 = $720,000.
The firms or employers are still worse off since their surplus they get for participating in the market is lower compared to when the minimum wage law was not in action. Before the implementation, the surplus of the firms was $3,000,000, and now it is $1,080,000.
Though the welfare of the firms is still low, that of workers or producers has improved. Before the minimum wage, the workers surplus was $1,500,000, and now it is $2,700,000. A significant rise in the welfare of producers or employees shows that they are now better off than before.
On the other hand, the welfare of the society has declined from $4,500,000 to $2,700,000. Therefore, still, the welfare of the whole society is lower than when the wage was determined by the price mechanism, the society is still worse off.
No. The enactment of the minimum wage by the Fair Work Commission is not ethically justified as it causes allocative inefficiency, that is, this policy diminishes the total surplus of the society. The deadweight loss resulting from the enactment of such a policy is one of the aspects that result in a decrease in total surplus. The deadweight loss takes place because any company which is willing to engage a worker for remuneration lower than the minimum wage it cannot do so (Sloman et al., 2015, p.35). Similarly, those candidates looking for work cannot obtain one because, at a minimum wage, the employers will not be willing to hire more people. As a result, such workers waste a lot of resources and time searching for employment.
From the analysis of question seven, it is clear that the introduction of the minimum wage of 19 dollars per hour by the Fair Work Commission has reduced the welfare of workers substantially. This evidence indicates the minimum wage is an efficient and blunt approach for diminishing income inequalities and poverty in the society (Mankiw, 2014, p.87). Moreover, studies show that the implementation of the minimum wage hurts more employees in the private sectors of the economy. This is because the enactment of the minimum wage prevents the companies from employing new staff and also makes the employers to lay off some workers as they try to cut on the cost of doing business. As a result, since the minimum wage makes the employees worse off, the enactment of such a policy is not ethically justified.
On the other hand, the analysis of question nine depicts that the enactment of minimum wage results in the improved wellbeing of the unskilled employees. The implementation of a minimum wage assists the working poor particularly at a time when the cost of living is escalating and when the income inequalities are widespread (Sloman et al., 2015, p.42). Hence, since the minimum wage increases the welfare of the working poor, this policy is ethically justified.
The theory of Deontology holds that we have the moral obligation to act according to a particular set of rules and principles regardless of the outcome. According to Immanuel Kant, the founder of this theory, an action is wrong or right depending on the scrutiny of whether the action in question agrees with or disobeys the categorical imperative. Moreover, Kant argues that human life would be useless if justice were to be taken away (O’Mahony, 2013, p.65). Therefore, based on the theory of Deontology, minimum wage is desirable and should be implemented. Foremost, the minimum wage will ensure that workers get justice by receiving a living wage for the efforts and time they put in their works. A living wage is necessary because it will enable an employee to support himself or herself as well as his families as per the accepted standard of living in the community (Hubbard et al., 2016). Furthermore, a living wage is important because low wages and salaries for persons at the bottom of an economic ladder cause a deprivation to them and their families especially for single parent families. As a result, the government should enact minimum wage legislation to guarantee that workers particularly the poor ones receive a living wage to support themselves and their families.
Reference List
Case, K.E., Fair, R.C. & Oster, S.M., 2014. Principles of economics. Harlow, England: Pearson.
Fair Work Ombudsman, 2018. Minimum wages. [Online] Available at: https://www.fairwork.gov.au/how-we-will-help/templates-and-guides/fact-sheets/minimum-workplace-entitlements/minimum-wages [Accessed 2nd October 2018].
Hubbard, R.G., Garnett, A., Lewis, P.E.T. & O’Brien, A.P., 2016. Essentials of economics. 3rd ed. Melbourne, Victoria: Pearson Australia, [2016].
Mankiw, N.G., 2014. Principles of economics. Stamford, CT : Cengage Learning.
O’Mahony, P., 2013. The contemporary theory of the public sphere. Oxford ; New York : Peter Lang.
Sloman, J., Wride, A. & Garratt, D., 2015. Economics. 9th ed. Harlow : Pearson.

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