Panel (b> oí Figure 4 shows what happens when the government imposes .1 pricc floor of $4 per cone. In this case, because the equilibrium price of S3 is below the floor, the price floor is a binding constraint on the market, The forces of supply and demand tend to move the price toward the equilibrium price, but when the market price hits the floor, it can fall no further. The market price equals the price floor. At this floor, the quantity of ice cream supplied (120 cones) exceeds the quantity demanded (80 cones). Some people who want to sell ice cream at the going price are unable to. Thus, a binding price floor causes a surplus.

Just as the shortages resulting from price ceilings can lead to undesirable rationing mechanisms, so can the surpluses resulting from price floors. In the case of a price floor, some sellers are unable to sell all they want at the market price. The sellers who appeal to the personal biases of the buyers, perhaps due to racial or familial ties, are better able to sell their goods than those who do not. By contrast, in a free market, the price serves as the rationing mechanism, and sellers can sell all they want at the equilibrium price.


An important example of a price floor is the minimum wage. Minimum-wage laws dictate the lowest price for labor that any employer may pay. The U.S. Congress first instituted a minimum wage with the Fair l.abor Standards Act of 1^38 to ensure workersa minimally adequate standard of living. In 2W7, the minimum wage according to federal law was 55.15 per hour, and it was scheduled to increase to $7.25 by 2010. (Some stales mandate minimum wages above the federal level.) Most European nations have minimum-wage laws as well; some, such as France and the United Kingdom, have significantly higher minim urns than the United

To examine the effects of a minimum wage, we must consider the market for labor. Panel (a) of Figure 5 shows the labor market, which, like all markets, is subject to the forces of supply and demand. Workers determine the supply of labor, and firms determine the demand. If the government doesn't intervene, the wage normally adjusts lo balance labor supply and labor demand.

Panel fb) of Figure 5 shows the labor market with a minimum wage. If the minimum wage is above the equilibrium level, as it is here, the quantity of labor supplied exceeds the quantity demanded. The result is unemployment. Thus, Ihe minimum wage raises Ihe incomes of those workers who have jobs, but it lowers the incomes of workers who cannot find jobs.

To fully understand the minimum wage, keep in mind that the economy contains not a single labor market but many labor markets for different types of workers. Tlx: impact of the minimum wage depends on the skill and experience of llu; worker. Workers with high skills and much experience are not affccted because their equilibrium wages are well above the minimum. For these workers, the minimum wage is not binding.

The minimum wage has its greatest impact on the market fur teenage labor. Ihe equilibrium wages of teenagers are low because teenagers are among the least skilled and least experienced members of the labor force. In addition, teenagers are often willing to accept a lower wage in exchange for on-the-job training. (Some


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