Class#38 12/2/11

Rizzo started class by putt up 2 charts on the board. 1 was the rent control demand and supply chart from last class. He also put up the market for apple pricing market. (aka minimum wage) in this the supply is the workers and the demand is the firms. He wrote under it that the New EQ= W*=$7.25, Qs=90k, Qd=50k making an unemployment number of 40k.

Talking about the first graph, when rent control is put in a market, rent control created a shortage of 4,000 apartments. To make people go away, the actual cost of getting an apartment is $1,200 through other fees. Since there are less apartments available, it reduces the quality of the product. Also people who aren’t fortunate still don’t get it. Landlords try to keep people out of the apartment so that they can jack up the price based on the price ceiling rules.

Cities are the most productive and expensive places to be. More productive in cities so poor should be there because they earn more. If a person from Africa making $1,000 a year moved to New York, his pay would instantly rise 20x to $20,000 a year. The increased salary increases real estate. Vouchers used for rent money would be the best way to keep the poor in the city. An increase in prices for housing is what kicks the extra people out. San Diego houses cost more than Dallas with very similar salaries and living conditions because it’s costlier to build things in Southern California.

When talking about the second graph, Rizzo said what determines wages in a market is a person’s productivity. In the apple market,  the workers ability to pick apples plus our value as consumers of apples determines their wages and employment numbers.

If you want to get someone’s yearly salary, multiply their wage by 2,000.

If things become costlier, companies hire less. The market forces would push it back towards equilibrium by paying more.

The minimum wage causes more unemployment by trying to raise employment.

Companies take away their workers benefits if they are forced to pay more. Since it is now more expensive to hire workers, it incentivizes companies to get machinery to replace them. An example of this is the saw machine in a bagel place to cut bagels. One less worker is employed because the machine was bought.

An interesting fact is that in WWII they had a maximum wage limit because there was so much competition since there were more workers needed than available in the US.

Firms adjust to increased costs in many ways. It is not always less workers. It could be no heat in the winters, no benefits for workers. The minimum wage ruins other markets. The minimum wage creates unemployment.

Who makes the minimum wage? 4.4 million Americans. If every one of these workers were poor, then it is Ok to have higher wages, but very little who make the minimum wage are poor. Half are under 24, 40% are married. Over 70% make over 2x the poverty line. Not the people we want making the minimum wage.

The difference between rarity and scarcity is that scarcity is when more people want a product than is available. Oil is abundant but scarce. Rare means that there is not a lot of it. Doesn’t always mean scarce. Rizzo’s wedding ring is rare but not scarce. No one else wants it.

Supply of labor is inelastic. Demand elasticity of labor is 3 meaning that a 1% increase in firm costs, result in a 3% decrease in workers.

*Apple pickers are not scarce. Scarcity means that we have to make a trade off to get good. Still have to do a trade off when there is a surplus. Doesn’t say anything about scarcity.

Rizzo then talked about illegal drugs and the supply and demand curve of it. When things are illegal, that product is inelastic. The supply curve gets steeper when we make things illegal. If everything is legal, when the price of the drug increases, the producer plants another bush. When illegal, extra costs are incurred to ship goods. This increases the amount of drugs and costs because makers now have to avoid being detected. Rather than growing just a small plant where no security is needed, if you grow a lot you need more things to protect your project.

The more we grow, the more protection we need. Bigger costs. Price goes up from this. This creates large profit opportunities. Change in composition in who’s producing it when price goes up.

*When you produce more, hiring costs go up because more security and products are needed. When illegal, more powerful drugs are made. The probability of getting caught is the same if it is the same amount produced of two different drugs. People take bigger risks in what they produce because of this.