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Definitions

1. Scarcity: The idea that available resources (land, labour, capital, entrepreneurship) are limited and unable to satisfy unlimited human needs and wants.
2. Production Possibilities Curve (PPC): Curve that illustrates all possible combinations of two goods that an economy can produce at maximum output when using all available resources and current technology efficiently.
3. Opportunity Cost: The value of the next best option that must be forgone or sacrificed in order to acquire something else.

Diagram

• Production Possibilities Curve (PPC) Diagram:
  • The diagram should be a concave curve to the origin, illustrating the trade-offs between two goods (e.g., Good A and Good B).
  • Points on the curve represent efficient production levels, points inside the curve indicate inefficient use of resources, and points outside the curve are unattainable with current resources.
  • The diagram should include labeled axes, the curve itself, and at least one point inside, on, and outside the curve.

Explanation

• Understanding Scarcity and Choices:

  • Scarcity arises because resources are limited while human wants are unlimited, necessitating choices about how to allocate resources efficiently.
  • The PPC illustrates scarcity by showing the limits of production capabilities given finite resources.

• PPC and Opportunity Cost:

  • Movement along the PPC demonstrates opportunity cost. Choosing more of one good results in less of another due to limited resources.
  • For example, moving from one point on the PPC to another involves sacrificing some quantity of Good A to gain more of Good B, illustrating opportunity cost.

• Efficient and Inefficient Production:

  • Points on the PPC represent efficient use of resources, where the economy is maximizing its production potential.
  • Points inside the curve indicate inefficiency, where resources are underutilized, possibly due to unemployment or underemployment.

• Economic Growth and Shifts in the PPC:

  • Economic growth can shift the PPC outward, indicating an increase in an economy's capacity to produce goods and services.
  • This shift can result from factors such as technological advancements or an increase in resources.

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Definitions

1. Minimum Wage: The lowest legal remuneration that employers can pay their workers.
2. Unemployment: When people of working age (16-65) who are actively seeking and able to work, but are not employed.
3. Price Floor: A minimum price set by the government for a good, above the equilibrium price.

Economic Theory

• Introduction to Minimum Wage:

  • A minimum wage is set above the equilibrium wage in a competitive labour market.
  • It aims to ensure a minimum standard of living for workers.

• Effects on Labour Market:

  • Price Floor: A minimum wage acts as a price floor in the labour market.
  • Surplus of Labour: If set above the equilibrium wage, it can lead to a surplus of labour, i.e., unemployment, as the quantity of labour supplied exceeds the quantity demanded.
  • Diagram: A standard labour market diagram should be used, showing the supply and demand for labour, with the minimum wage line above the equilibrium wage, leading to a surplus (unemployment).

• Impact on Firms:

  • Increased labour costs may lead firms to reduce hiring, cut hours, or increase prices to maintain profit margins.
  • Small businesses may be disproportionately affected due to tighter budget constraints.

• Impact on Workers:

  • While some workers benefit from higher wages, others may lose jobs or face reduced hours.
  • Potential for increased motivation and productivity among workers who retain their jobs.

Diagram

• Labour Market Diagram:
  • X-axis: Quantity of Labour
  • Y-axis: Wage Rate
  • Show equilibrium wage and quantity.
  • Indicate minimum wage above equilibrium, leading to a surplus (unemployment).

Evaluation (SLAP)

• Stakeholders:

  • Workers: Some benefit from higher wages, while others face unemployment.
  • Firms: May experience increased costs, leading to reduced hiring or higher prices.
  • Government: Balances social welfare with economic efficiency.

• Long-run vs. Short-run:

  • Short-run: Immediate unemployment effects and potential inflationary pressures.
  • Long-run: Firms may adapt through automation or relocation, potentially reducing the labour force further.

• Advantages vs. Disadvantages:

  • Advantages: Reduces poverty, increases standard of living for low-income workers, and can stimulate demand through higher disposable income.
  • Disadvantages: Potential for increased unemployment, especially among low-skilled workers, and higher costs for businesses.

• Prioritize:

  • The desirability of a minimum wage depends on the balance between social benefits and economic costs. Policymakers must consider local economic conditions and labour market dynamics.
  • Real-world example: The federal minimum wage has been a topic of debate in the USA. Studies show mixed effects; some states with higher minimum wages have seen reduced poverty rates, while others report increased unemployment among young and low-skilled workers.

Conclusion

• The minimum wage can have both positive and negative effects on an economy, depending on various factors such as the level set and the elasticity of demand for labour.
• Real-world examples, like those from the United States, illustrate the complexity of its impact, highlighting the need for careful consideration in policy design.
• Ultimately, the desirability of a minimum wage policy is context-dependent, requiring a nuanced approach to balance economic efficiency with social equity.