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Economics 101: Principles of Economics

Economics 101: Principles of Economics. Questions? Quiz #2 Friday. Elasticity and Total Expenditure. GGB toll = $1, then 100,000 trips. If  = -2, what happens to # trips when you toll by 10%? Total revenue? When D is: Price and Total expenditure move in:

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Economics 101: Principles of Economics

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  1. Economics 101: Principles of Economics • Questions? • Quiz #2 Friday.

  2. Elasticity and Total Expenditure • GGB toll = $1, then 100,000 trips. If  = -2, what happens to # trips when you toll by 10%? Total revenue? • When D is:Price and Total expenditure move in: elastic opposite directions inelastic the same direction unit-elastic TE doesn’t change as P changes D unit-elastic P D elastic D inelastic Q

  3. More Elasticities • Price elasticity of supply measures how responsive production of a good is to a change in its own price.  = (QsX/QsX)/(PX/PX) If  > 0, then the supply curve slopes upward. If  = , the supply curve is horizontal. (dimes/nickels) If  = 0, the supply curve is vertical. (original Kandinsky’s) If  > 1, then we say supply is ELASTIC. If  < 1, then we say supply is INELASTIC. If  = 1, then we say supply is UNIT-ELASTIC.

  4. Elasticity • Suppose that instead of a linear D-curve, Q = a – bP, we have Q = 1,200/P as the demand for zip drives. • This is a hyperbola. PQ = 1,200 regardless of the price. • Total Expenditure is constant! • In general, if demand takes the form Q = aPb (b < 0), the price elasticity of demand is constant and equal to b. • No need to worry about specifying the point at which elasticity is measured.

  5. Minimum Wage Law • Minimum wage is a prime example of a price floor. • Introduced in 1938 by FLSA • Goal was to ensure reasonable compensation for work effort and mitigate prevalence of poverty • $0.25/hour for employees of large, interstate firms • 43% non-supervisory workers covered at first • Agriculture and retail sales exempt at first • Today? http://www.dol.gov/esa/welcome.htm

  6. Minimum Wage Law • What is the effect on employment of  minimum wage? • Theoretically • Reduces employment of low-skilled/low-wage • Helps those who happen to keep their job • Ceteris paribus (more than just a flickerball name) • If D for low-wage labor is elastic, Total Income would be made smaller if W raised • Labor demand is:Total Income & wage elastic move in opposite directions inelastic move same direction unit-elastic Total Income unchanged

  7. Effects of Minimum Wage • Empirically • Teenage workers are primarily affected (low wages anyway) 10%  W  1-3%  teenage employment • Min wage is set nominally & adjusted infrequently Constantly changing incentives for employment Divide the nominal min wage by price level Regional differences in prices  WAK < WMS  EAK <EMS 3. Min wage does not cover everyone • Employees of small retail & service firms not covered • Plus, compliance is not 100% • How does this affect the employment response to  W ? • Overall loss of jobs is less than jobs in covered sector

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