ECONOMICS FOR BUSINESS
Explain why the introduction of a minimum price above the equilibrium price reduces social welfare In a free market demand and supply alone determine the price. This means that quantity of demand and quantity of supply equate at this point is where the price is set which is therefore called equilibrium price. (Griffiths, 2011)
Figure 1 illustrates where supply and demand intersect, this being the Equilibrium price and Quantity, shown by P1 and Q1. If we introduce a minimum price above the equilibrium price it creates excess supply in the market. This is shown in figure 2.
Excess supply is shown in figure 2 between Qd and Qs, where Qd is the quantity demanded at P2 and Qs is the quantity supplied at P2. To illustrate how a minimum price can reduce social welfare we introduce minimum wage to the concept of supply and demand. Social welfare is defined as “the well-being of the entire society” (Business dictionary, 2013). The increased price of minimum wage above the equilibrium price will produce excess supply which will reduce social welfare. This is illustrated by Figure 3.
(Griffiths, 2011) If the government set the minimum wage level above equilibrium there would be an excess supply of labour by Qd - Qs. In this case instead of the market price falling due to excess supply it would be the level of employment falling due to excess supply of labour. This would be due to employers having to reduce the numbers they employ due to the increase in the minimum price, thereby reducing social welfare.
Explain why a profit maximizing firm produces the output that equates marginal revenues to...
Bibliography: (2013) Business Economics, Available at:(Accessed: 15th Nov 2013 ).
Griffiths, A. (2011). Economics for business management. 3rd ed. Harlow: Ft Press
(2013) Long-run output , Available at:(Accessed: 15th Nov 2013 ).
(2013) social welfare, Available at: (Accessed: 15th Nov 2013 ).
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