Read this article from the Times: http://www.nytimes.com/2012/04/21/world/americas/venezuela-faces-shortages-in-grocery-staples.html?_r=1 (Links to an external site.)
How does this relate to the theories from the chapter?
The article about the Venezuelan government and its strict price controls on food in an attempt to help the poor relates to this chapter in a few ways. Food in free-market economies should follow the natural path of supply and demand, the Venezuelan government is trying to control this which creates a binding price ceiling. The effect of a binding price ceiling will create a shortage of the good and sellers must ration the scarce goods amongst a large number of buyers. In the ten principles of economics, we know that markets are a good way to organize an economy. Prices are decided by supply and demand. Most economists disagree with using price controls because of these reasons. Many economists think there are better ways to handle issues intended to help the poor besides price controls. An example would be giving the poor money to spend on food instead of lowering the cost.
Now consider a different case. After Hurricane Katrina speculators brought in bottled water, but charged quite a lot for it. What might have happened had price controls been imposed? Where does the concept of fairness fit into this theory?
In the case of Hurricane Katrina and the price gauging for a bottle of water, I think price controls could have been a good idea, for a limited time. However, I wonder if that would have affected the desire of speculators to bring in bottled water? I think that in this case water is an essential human need and after a natural disaster price controls for water should have been initiated for a limited time. I think fairness fits into this theory by the difference between a natural disaster vs. government. Either way, I do not think either situation is “fair”.
How are the two disaster situations different? Will supply and demand be affected in the same way? Why or why not? What information is conveyed by the price in both situations? Is it accurate? How do prices tell people to behave?
Both Venezuelen’s and Hurricane Katrina are disasters but for different reasons, government controls vs. natural disaster. I believe that supply and demand would be affected in the same way, the only difference is that water is a necessity vs. having to cook or eat differently. The effect of a binding price ceiling will create a shortage of the good and sellers must ration the scarce goods amongst a large number of buyers. Prices are decided by supply and demand. Prices, or shortages, could tell sellers who they want to sell to based on personal biases, in a free market the price is the rationing mechanism.
Last, choose an article about increases in the minimum wage and comment on it using the theories from this chapter in your comments.
This article from the New York Times debates the common topic of minimum wage and job loss. People for the $15.00 minimum wage increase believe this will help 1.3 million people out of poverty. Also, previous research saying an increase in minimum wage would put people out of work is substantially less than previously thought. People against the wage increase disagree with this bill because it will put 1.3 million people out of work. This is a highly debated topic amongst economists. Implementing a minimum wage means this it is a price floor imposed by the government. Workers determine the supply and firms determine the demand of the labor market. Based on our book, and the ten principles of economics we know that markets are a good way to organize an economy and prices (or minimum wage) are decided by supply and demand. I can see the debate that the minimum wage is a good way to help raise the income of the working poor. I can also see the debate that raising the minimum wage could cause unemployment. I like how the book gives another option of wage subsidies.
Principles of Macroeconomics Spring 2020 