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M09.L02 — Price Floors: Minimum Wages and Surpluses

Module: Module 09 — Price Regulation, Taxes, and Subsidies Lesson: L02 of 05 Duration: ~30 minutes Level: Introductory Provenance: Principles of Microeconomics (Curtis and Irvine) | MIT OCW 14.01 Principles of Microeconomics

Learning Objective

Analyze how price floors create surpluses and affect labor markets.

Minimum Wage in Australia

The Fair Work Commission sets a national minimum wage ($23.23/hour as of 2023). This price floor ensures workers earn a living wage but can reduce employment opportunities, especially for low-skilled workers. The impact depends on labor demand elasticity: in competitive markets, higher wages may reduce jobs, but in monopsony markets, they can increase both wages and employment.

Worked Example

Minimum Wage and Employment

  1. Equilibrium wage: $20/hour, Quantity of labor = 1,000 workers.
  2. Minimum wage imposed: $23.23/hour.
  3. Result: Quantity demanded falls (fewer jobs), but quantity supplied rises (more people seek work). Surplus = 200 workers unemployed.
  4. Monopsony exception: If the employer has market power, a minimum wage can increase employment.

Common Misconception

"Minimum wages always reduce employment."

In monopsony markets (single employer), a minimum wage can increase both wages and employment by countering employer power.

Key Takeaways

  • Price floors set above equilibrium create surpluses.
  • Minimum wages can reduce employment in competitive markets but may increase it in monopsonies.
  • Agricultural price floors (e.g., wheat boards) similarly create surplus produce.
  • Elasticity of demand determines the employment impact.

Practice

  1. How does a price floor affect the quantity supplied and demanded?
  2. Why might a minimum wage increase employment in a monopsony?
  3. What are the trade-offs of agricultural price supports?

Further Resources

Provenance: Principles of Microeconomics (Curtis and Irvine) | MIT OCW 14.01 Principles of Microeconomics