Class Summary #38 for 12/2/11

In class today, we learned about a lot of different things.

We went over two graphs: a graph with a price ceiling (which I will refer to as section A.) and a graph with a price floor.

A. When you put a price ceiling, 4,000 people do not have housing. The price needs to therefore be raised to $1200 (not necessarily in terms of money, but there needs to be a cost increase- cost can be anything, not just money) to ration out those 4,000 people away. This could result in housing being lower quality and there being less availability, and those who value the housing the most may not necessarily get it.

As a result, rent control causes sellers to try to keep tenants out to avoid the above problem.

Some other interesting facts: Income increases by a factor of 20 immediately if you take a laborer from Nigeria and put them in a city. That is why the most money is in cities, which explains why housing is most expensive there.

A potential solution: give housing vouchers. This keeps markets in tact, overcomes problem of supply and allows people to pay more than price. But this is the 2nd best solution.

Best solution: Housing voucher gives you money to participate in market, but why should we limit it to housing? We should let them use the vouchers to buy whatever they want. It is not good to restrict people's choices so if we allow them to use vouchers on whatever, maybe they will buy a cheaper house and then spend money elsewhere as well. This is more beneficial for our economy.

B. This was the first time we learned about price floors. When looking at this example, which shows wages, we must ignore benefits and inflation. Just consider the wage itself.

What determines wages in a market? You're ability to produce mixed in with how much your production is valued in the market.

If a worker's wage goes up, generally workers will want to work more. In an effort to pay people more (price floor), you've actually made it more difficult for people to get jobs and for existing workforce to keep their jobs.

For example, you will still get paid minimum wage, but you make equivalent of $4.85 because now the company can't afford the higher wage. So you lose out on getting paid in other ways- less vacation time/benefits, etc. The minimum wage might make a company not be able to afford the wage so they have to adjust the other higher prices.

Is there a better way to help low wage workers? We need to figure out a way to get this problem fixed, by getting rid of surplus lower so it can be at a true EQ. This could happen if we lowered minimum wage so it can reach EQ below the price floor.

Because of all of this, minimum wage creates unemployment.

Important: Most of the people who make minimum wage are not the types of people who minimum wage is supposed to be targeting anyway, so it is a waste. There are not the poor people making minimum wage. Rather, they are married, over 24, etc.

Then class concluded with Rizzo teaching us about important stuff.

An exam question he gave us is what is the difference between scarcity and rarity?

1. Scarcity= more people want a good than it is available
2. Rarity= something can be rare but undesirable, such as Rizzo's wedding ring. Only one of them in the world, but few want tit.

Oil: abundant in supply but very scarce because we want more of it. So not rare, but scarce.

Question: Does a presence of surplus mean we don't have scarcity? No. When goods are in surplus, still need to do a trade to get them. When there is a surplus, it means price is all messed up.

FInally, we learned about the economics of "illegalizing" certain things. To illustrate this lesson, Rizzo drew another supply and demand curve. The graph represented making drugs illegal.

So what are possible results of making drugs such as cocaine and marijuana illegal?

1. It won't abolish the supply and demand process if something is made illegal. The supply curve will get much steeper.
2. When everything is legal and prices go up, we can just plant another drug bush. When it is illegal, we bear more costs to produce illegal drugs because we have to avoid being detected. Therefore, this involves more work and a greater opportunity cost. If we produce less, there is less of a cost. As you choose to make more, we need to do more things to protect ourselves. Cost goes up as we produce more and supply gets more elastic.
3. When the price/cost goes up, there are less drugs sold, especially because of threat of being caught.
4. Also, what you see is that you will sell more powerful stuff because people will not be as willing to risk getting in trouble for less valuable stuff. For example, if someone sells marijuana and cocaine, they are equally as likely to be caught for each. Therefore, if they are looking to make money, they will probably turn to selling the more powerful/dangerous drug of cocaine because it is worth more money and more worth the risk than marijuana. So, more powerful stuff is therefore sold/developed.
5. There will also be a change in composition in who makes/sells the drugs because some people have a comparative advantage in not getting caught for whatever reason, so they would probably be more likely to sell a drug than would someone who does not have a comparative advantage in that sector.