Answer to Question #198000 in Economics of Enterprise for Suresh Moodley

Question

Discuss the type of price control that a government would implement if it wishes

to impose a national minimum wage. Include in your answer the economic effects

of such a price control. Motivate your answer with the aid of a diagram

Answer 1

$$Solution$$

Price ceiling and price floor

A price cap is a legal limit imposed by the government on the price of a specific product or service in the marketplace; the theory is that an increasing price would reach the "ceiling" and will not be able to rise any more. The official justification for a general price limit is usually that it holds essential goods affordable for the poor.

A price floor is a statutory minimum below which the government would not allow the price of a product or service to fall. Buyers who pay less than the floor price can face fines or other penalties. The public rationale for price floors is that certain vendors are entitled to a higher price for their products or services than they would obtain in a free market.

economic effects can be :

A price ceiling will not only reduce the short-run supply, but it will also reduce the long-run supply as entrepreneurs and investors adjust to the new realities and transfer their efforts and money to lines that are not subject to price controls.

Reduction in the quality of the good or service being regulated.

With price floor there will be induced surplus of unskilled labor and reduce demand for labor to cut on costs.