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This paper discusses the demand and supply elements of a market by evaluating the variations that occur in demand and supply of goods and services as a result of a number market processes. First, the effect of setting a minimum wage for workers on the supply and demand of labor in a labor market is evaluated. The effect of price control measures on the demand and supply of commodities in a market is also analyzed, and lastly, the effect of taxation on demand and supply of commodities in a market is evaluated.
1. Minimum wage legislation
To demonstrate the effect of minimum wage legislation by the regulatory authority in a market, the wage paid to workers in dollars per hour is plotted against the quantity of labor in thousands of workers, and the variations in demand and supply of labor in the market are deduced as needed from the graph. In the labor market depicted by the downward-sloping and the upward-sloping curves, the equilibrium wage that is paid to every worker is 6 dollars, while the equilibrium quantity of the labor that these workers undertake in the particular market is 300,000 workers. In case the senator in the state where the market is introduced a bill meant to legislate a minimum wage to be paid to the workers every hour, this type of price control by state authority would be called a legal minimum wage rate.
At a wage of 4 dollars for every hour, firms would demand a labor quantity of 400,000 workers while the supply of labor in the market would be 200,000 workers. As such, there would be a deficit of 200,000 workers in this market; hence the wage paid to every worker will increase due to the high demand for laborers. The absence of such a price control measure in the market would exert an upward pressure on the wages up to the point when the market achieves equilibrium. With a price control in place, however, the labor market may or may not be able to reach its equilibrium. In this particular case, the minimum wage of 4 dollars per hour to be paid to workers if the bill is enacted into law will not prevent the market from reaching its equilibrium. According to economists, a minimum wage that prevents a labor market from reaching equilibrium is called a binding minimum wage. Considering two other senators introducing bills that would set the minimum wage at 3 dollars or at 9 dollars per hour, the minimum wage that would be binding would be the 9 dollar per hour wage as it would prevent the labor market from reaching equilibrium.
2. Price controls in the Florida orange market
The Florida orange market sells oranges in units of 90-pound boxes, as depicted by the graph in which the price in dollars per box is plotted against the quantity of oranges in millions of boxes. From the graph, the equilibrium price in the market is 12 dollars per box, and the equilibrium quantity of oranges is 225 million boxes. In the event of a congressman from New York being pressurized by constituents alarmed at increasing prices of orange juice, he may introduce a bill to set a price ceiling per a box or oranges. If this market arbitrarily starts at the price ceiling of 9 dollars per box, the quantity of oranges demanded in the market will be 375 million boxes, whereas the quantity of oranges supplied will be 225 million boxes, leaving a shortage in supply of 150 million boxes of oranges.
Suppose no price controls are introduced into this market, there would be an upward pressure on the prices of oranges until the market achieves equilibrium. When a price control measure is put in place, however, this market may or may not be able to reach its equilibrium. A price ceiling that prevents a market from reaching its equilibrium is referred by economists as a binding price ceiling. In the case of the Florida orange market, the price ceiling of 9 dollars per a box of oranges will not prevent the market from reaching the equilibrium.
Given that it takes many years before the newly planted orange trees can bear fruit, the supply curve for oranges in the short term is almost vertical as observed from the graph, and farmers are at liberty to plant oranges on their farms, or to plant something else, or even sell their land altogether. For that reason, the long-run supply of oranges in the Florida market is much more price sensitive as compared to the short-run supply of the fruits. Taking the assumption that the long-run demand for the oranges is the same as the short-run demand, it would be expected that the long-run effect of a binding price ceiling would be larger that the short-run effect of the same price ceiling.
3. Effect of tax on demand and supply
To demonstrate the effect of taxation of the demand and supply of a market, the market for wine in the United States is used whereby the price in dollars per a bottle of wine is plotted against the quantity of wine in bottles. From the graph, the market is observed to be in equilibrium initially. When the government institutes a tax of 8 dollars per a bottle of wine to be paid by the seller, the price paid by the sellers per a bottle increases, and the price paid by buyers also increases by a larger margin leading to decreased demand and decreased quantity of the commodity that is sold. The introduction of the tax shifts the supply curve to the left, meaning that the quantity produced and supplied is reduced. Conversely, the tax burden for sellers becomes 3 dollars per bottle while that for buyers is 4 dollars per a bottle of wine. Additionally, the elasticity on the sellers’ side becomes 1.22 while on the buyers side becomes 1.74, a value greater than that of the supply side. As such, the burden of tax falls more heavily on the demand of the market.
From the market evaluations done above, it is observable that setting of a minimum wage may make the labor market reach equilibrium on one hand; while on the other hand, the market may not reach equilibrium if the stipulated wage is a binding minimum wage. Secondly, controlling the price of commodity in a market by setting a binding price ceiling prevents the market from reaching equilibrium, but the market may reach its equilibrium if the ceiling price is not binding. Lastly, it is observed that taxation affects demand and supply, in that the institution of a tax on a commodity causes a decrease in demand of the commodity when the tax burden is heavier on the demand side, and results in an increase in the price of the commodity for the seller too, with the burden of taxation falling more heavily on the demand side of the market.
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