It is January 2017 and, miraculously, Bernie Sanders has become president. As su
ID: 1228426 • Letter: I
Question
It is January 2017 and, miraculously, Bernie Sanders has become president. As such, he raises the minimum wage to $15 per hour. Answer the following: How will a dramatic increase in minimum wage affect the demand for goods? How will it affect the price of goods? How will the demand curve change? Explain in words. How will a dramatic increase in minimum wage affect the supply of labor? What are some possible consequences of instituting a wage floor? (Remember, when a wage floor is present, the price of wages cannot fall below the minimum wage.) Describe the process by which comparative advantage and specialization lead to economic growth.Explanation / Answer
1) How will a dramatic increase in minimum wage affect the demand for goods. How will it affect the price of goods? How will the demand curve change?
The mandated cost increase of the minimum wage to 15per hour possibly would cause employment reductions, and increasing inflationary pressure. With increase in prices, consumer will undercut consumption, thus demands for goods will go down. Employment reduction would result to negatively sloped labor demand curve.
How will a dramatic increase in minimum wage affect the supply of labor. What are some possible consequences of instituting a wage floor
If the minimum wage is set at 15, the reduction in employment is smaller than the excess supply of labor, thus the upward sloping supply curve.
The possible consequences of setting wage floor would be cost increase pressure can be passed to consumers, Capital can be substituted for labor thus would increase unemployment, increase inflation
2) Describe the process by which comparative advantage and specialization lead to economic growth?
The law of comparative advantage states that individuals and societies in nations are better off when they produce goods and services for which they have a comparative advantage in supplying. The nation can enjoy the benefits of comparative advantage if specialize in the production of the goods and services in which the absolute disadvantage is smallest (i.e. these are the commodities of country comparative advantage) and import the goods and services in which it’s absolute disadvantage is greatest (these are the commodities of its comparative disadvantage).
As we know resources are distributed unevenly throughout the world, and if countries specialize in the production of the goods in which they have the lowest opportunity cost, and trade that good with other nations, countries can increase their wealth. Countries will usually specialise in and trade products in which use they can use intensively the factors inputs and they are most abundantly endowed.
Benefit from specialization and trade to individuals and societies includes:
1. Greater Economic Efficiency: As countries have specialisation they can produce goods in which they have the lowest opportunity cost compared to other, thus yields efficiency
2. Consumer Benefits: As an consumer, individuals and societies gets product at lower cost, thus benefits them
3. Opportunities for growth for competitive sectors: Specialization can give countries with few resources an entry point into global trade, therefore provides an opportunity for growth for competition.
4. Increase Wealth: With Low opportunity cost countries can increase their wealth. When the wealth of country rises, the standard of living of individuals and society of that country raises too.
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