welcome back uh we are now going to discuss about price flows we ended our discussion
on price ceilings and we are going to talk about now price floors so uh the example that
i gave in the earlier uh section on price floor was i talked about minimum wage so uh
and price floor can happen in case of agriculture products also so let me take the example of
minimum wage and let me just show what it does to the uh labour market .
so so this is a example of price floor and i
am taking the example of a labour market where a minimum wage is imposed by the government
so as i said so this is the labour supply and this is the labour demand and this is
the amount of labour this is wage so its basically the same framework of prices price of labour
is nothing but wage and quantity of labour is nothing by but number of people working
or number of hours worked in a day etc so it can be in any unit
so we have on the x axis we have the uh labour supply or demand and this is the supply curve
of labour this is the demand curve of labour no now as i said in the earlier class that
uh it is possible that the economy has whole lot of people who are looking for job basically
very unskilled people and with uh poor unskilled people who are who would like to work for
a very low amount level of wage so they are all there in the market and its
a highly populated uh market with a huge workforce in that case uh it is easy to imagine that
the market is probably going to clear at a wage which is say quite low which is its possible
that the market clears say right like today in india the minimum wage is rupees 160 per
day so it is 160 per day so say the market clears at 100 so the market
clears at 100 and the government says that see 100 is not a decent wage its not sufficient
for a person to maintain a subsistence level of consumption at this very low wage so uh
every employer has to pay a wage which is at least 160 so what happens if the government
uh decides that the wage is going to be uh price floor is going to be 80 nothing this
is not a binding uh constraint so this is this is not uh this is not binding
so this uh price floor of 80 would be non binding and so if the government imposes a
minimum wage which is 80 and below the market clearing wage then this minimum wage is non
binding and does not disturb the equilibrium in the market nothing happens in the market
the market just clears at 100 because any wage above that above 80 is acceptable to
the government . so so we are not interested in this case and
we are going to just stick to the above equilibrium level of prices we are going to just stick
to the above equilibrium level of prices so this is equilibrium and let me just this
is w e and the government now imposes a price floor at w f and the government says tells
all employers that you cannot pay a wage which is lower than w f now what happens in such
a situation uh it will probably uh it will be easier this
time since we have already discussed about price ceiling so you might have already figured
out that what happens in this case now since the wage has the market wage that can be offered
has gone up this is the minimum wage at this wage along the supply curve this many people
l 1 number of people or labourers would like to supply their labour they they would be
very happy to work at this higher wage so all this people now enter the job market they
are all looking for now job but what happens to demand the people who
are employing these people for them the cost of employing the people have gone up so now
they have to pay a higher wage than the equilibrium they have to pay a higher wage and they are
going to demand people or they are going to demand employees depending on what how much
wage they have to pay so when they see that they have to pay w f
w w f is the uh minimum that they can pay so they are going to demand l 1 dash or l
1 prime amount of labour they are they are basically reducing their labour demand so
earlier they were demanding l e now they are demanding l 1 prime amount of people to work
for them so what is happening so basically if the market
was left to itself market would have cleared at a lower wage and l e number of people would
be employed but now since the government has imposed a price floor or it has imposed a
minimum wage at a level which is above the equilibrium wage what has happened is the
employability of people or the the people looking for employees the producers looking
for employees uh they are going to demand less number of people to work for them and
on the other hand more and more people have entered the job market
so firstly the government has created this amount of unemployment because these people
could have been employed in the economy and now basically the the employers are no longer
employing this l 1 prime l e amount of people but there is also additional unemployment
in the economy because now l e l 1 amount of people have entered the labour market have
entered the job market looking for jobs so as a result of this minimum wage unemployment
has increased in the economy unemployment has increased in the economy because now because
the producers the producers or now because the uh employers have to pay a higher wage
they are employing less number of people so the first level of unemployment is created
over here the second level of unemployment is created because because the minimum wage
has gone up more people have entered the job market looking for jobs
so they also end up being jobless and so the amount of unemployment goes up in the economy
so this is what happens uh so basically uh what is what is this this is basically surplus
this is a surplus that has been created in the market the same way that the price ceiling
created a shortage in the market price floor has created a surplus in the market price
floor has created a surplus in the market .
now uh so uh coming back to the slides so uh we started with example of minimum wage
or minimum price of agricultural produce say wheat and uh we (discu) we showed the impact
uh we we showed what happens in case of a price floor with the labour market and what
is the how does actually labour market impact the people who are looking for jobs
minimum wage does not affect the highly skilled workers because highly skilled workers are
probably getting a wage which is much higher than the minimum wage so basically who are
the people who lose their jobs they are probably the people who work around uh who who were
accepting a wage level which is lower than w f
so these are the people who are actually losing the jobs which is not a good thing because
the minimum way way the minimum wage was probably imposed in the first place to protect this
poor people who were getting a low level low amount of wage and these people are in any
case many of these people are losing job because of this minimum wage requirement
okay uh and another thing that another uh impact of a price floor could be say for example
uh there is a price floor on wheat say there is a price floor on wheat and the government
basically is trying to protect the farmers and says that uh the the amount of that the
price of the wheat cannot be lower than a certain level
so what happens in that case since there is a price floor on wheat the many more farmers
would be willing to supply uh this uh this this this product because now there is a the
price cannot go down any further the price cannot go down and many many farmers would
like to uh supply so the same way it is if we imagine this diagram for say wheat market
so since the price has gone up of wheat so all these people wheat producers they will
enter the market and start supplying wheat in the market
but then what happens when the market when the government says that i i would like to
protect the farmers and you can go for because uh because of technology etc the the farmers
are producing huge amount of wheat and uh in normal circumstance unless and until of
course of there is a uh some some uh you know uh some drought or something so in such circumstance
maybe supply has contracted but in normal circumstance if there is a price flow because
there is bumper production many of the farmers are willing to sell their product at a higher
price and who is going to who is going to buy the products because there are no takers
in the market the demand is here since the price is higher
these people are people are not interested in buying more wheat so who buys the wheat
the the governments this policy will fail if the wheat is not sold because at the end
of the day that is what the government is trying to do the government is trying to protect
the farmers so what does the government do government buys up this amount of surplus
so to make the policy more effective of imposing a price floor on wheat what the government
has to do is it says that okay fine i am going to buy up this surplus wheat that the that
the farmers have brought into the market but does it end there no so once the government
purchases this wheat then this wheat has to be stored it has to be transported it has
to be distributed so that also incurs a lot of cost to the government
and where is that cost or where is that money going to come from for the government so the
so where is that going to come from it is going to come from the taxes that the government
raise from the people so then it is a double problem it is it is a uh so on the first place
in the first place the government has increased the price of wheat so people are paying a
higher price of wheat and secondly now the people are having to pay higher taxes to support
the government to support this price floor that the government has imposed
so so basically the price control disrupts the role of prices as signals for both buyers
and sellers now we saw in the last class that if the market is left to itself and if there
is by due to whatever reason if the price if the supply is too much what happens if
there is a surplus the suppliers know that to sell this product we have to reduce the
price so they start reducing the price and as they reduce the price more and more people
are buyers get interested they enter the market and they start buying
so prices basically go down till they reach the equilibrium till they reach the equilibrium
but in case of price floor and price ceiling what is happening is the price cannot adjust
in the market price cannot adjust in the market no matter uh there could be a shortage in
the market prices are not going to go up there could be surplus in the market prices are
not going to go down and the price does not signal properly
so basically in the long run instead of the problem resolving itself the problem becomes
bigger because in the long run say in the case of the price ceiling people have adjusted
the demand they they since electricity is cheaper they would now like to consume more
and more electricity so they have adjusted their habits so that they can use more and
more electrical gadgets because that is the cheaper of the fuels and and in the long run
on the other hand to the suppliers it is less attractive to produce
so they have shifted they have changed their plans they dont increase capacity because
they have to sell the produce at a low uh price decided by the government so the problem
becomes even bigger in the long run unlike the free market where the prices adjust price
acts as a signal and the equilibrium is reached in the long run in this case the problem actually
aggravates in the long run so uh so minimum wage can cause job losses
and rent control similarly rent control it can reduce the quantity or quality of affordable
housing what happens is government has introduced the policy with the uh with the very good
intention of making housing affordable and accessible to people but what is happening
is it does not have direct control on the suppliers
so the suppliers lose interest and they leave the market and so the the quality and quantity
of housing in the market goes down and on the other hand the low prices or the low rents
is a false signal to the people looking for a housing it is a false signal to the people
that uh housing is cheap so they are all adjusting their consumption uh habits and they are all
entering the market looking for uh houses to rent
so basically prices price controls they disrupt the role of prices as signals for both buyers
and sellers so basically what we are seeing is policies intended to help the society often
end up hurting them so policies intended to help the society often end up hurting them
like it is uh people are losing jobs in case of a minimum wage and in case of uh surplus
when when when there is a price floor uh it is the government has to incur a huge cost
of for it however this is this is not uh this discussion
is that the scope of this discussion is limited to the demand supply framework that i have
introduced and we have discussed this policy in the context of this very simple demand
supply framework that is not to say that price controls or government intervention or taxes
are uh summarily bad no i am not saying that all that i am trying to uh say here is given
this framework demand supply framework any disruption in the market can create some amount
of inefficiency in the market but sometimes the the objective of creating that inefficiency
far (surpass) surpasses these uh the inefficiency the end goal that is achieved uh sometimes
the the benefit is much much higher than the cost that uh is we are seeing here in this
very simple framework and coming back to this framework basically this uh teaches us how
to use this framework to see how the efficiency how efficiency is arrived at in a market uh
if it is left to itself and how prices act as a signal and help the market to come back
into equilibrium thank you