Micro Economics Analysis

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- Setting a minimum wage above the equilibrium market wage will cause businesses to employ fewer people. This creates a surplus, as the supply exceeds the demand. As the diagram shows and the table explains, the consumer, who is the firm, is worse off as they are paying a higher price. The minimum wage causes a decrease in consumer surplus by B and C. The producer, who is the employees, surplus changes by gaining area B and losing area F. The consumer surplus becomes smaller (worse off) and the producer surplus becomes larger (better off). The economic efficiency of the business becomes worse off, as they are paying more for employees due to the minimum wage, but are receiving the same output from employees. This therefore increases the cost of production, making the businesses worse off.

[pic 162]

Without minimum wage

With minimum wage

Change

Consumer surplus

A+B+C

A

-B-C

Producer surplus

E+F+G

G+E+B

+B-F

Total surplus

A+B+C+D+E+F+G

A+B+E+G

-C-F (DWL)

- Wage subsidies encourage businesses to employ unemployed workers as they receive benefits for doing so. The consumer (company) pays a lower price, and the producer (employee) gets higher pay, so it is thought that everyone is better off. However this is not the case, as the taxpayer is worse off, and therefore the government expenditure. Wage subsidies will cause the level of unemployment to decrease. However, the cost of taxes is likely to exceed the benefits it will provide, so it is thought that it will be economically inefficient.

[pic 163]

No Regulation

Subsidy

Change

Consumer surplus

A+B

A+B+E+F+G

+E+F+G

Producer surplus

E+I

B+C+E+I

[pic 164]+B+C

Government expenditure

0

-B-C-E-D-H-F-G

-B-E-C-D-H-F-G

Total surplus

A+B+E+I

A+B+E+I-D-H

-D-H (DWL)

-

- The elimination of the import quota will increase the amount of imports of beef into Indonesia, as the world price of beef is less than the price in Indonesia. Therefore resulting in a decrease in domestically produced beef. The Indonesian customers will now pay a lower price for beef.

[pic 165]

- Not having an import quota benefits the domestic buyers and will cause domestic sellers to be worse off. The consumer surplus increases by areas B,C and D, however the producer surplus decreases by area B. this is because consumers will now buy at the lower world price and not from domestic suppliers. Not having an import quota will increase the economic well-being of the nation, as the benefits of consumers is greater than the loss by domestic suppliers.

[pic 166]

Before Trade

After Trade

Change

Consumer surplus

A

A+B+C+D

B+C+D

Producer surplus

B+E

E

-B

Total surplus

A+B+E

A+B+C+D+E

+C+D