1. Antony Davies, Ph.D. Duquesne University Click here for instructions.

2. Navigation through the course will occur by clicking on the following action buttons located in the lower right corner of each screen: The HOME button will be placed in the center of each slide and will bring you to the Table of Contents for further navigation. The NEXT and BACK buttons will move you through the course content. The EXIT button will be placed at the end of each unit and will exit the unit and return you to the course menu.

3. This course is meant to be self-paced, though there will be opportunities to interact with your local and global JPIC groups. Course content and activities should be completed in the order that they are presented to maximize student success. The Table of Contents will be your starting point for each Unit

4. Each type of course activity has a unique icon located in the upper right corner of the screen. In this course you will: Global discussion Watch video Online journal Local discussion Read online ReflectCreate doc Quiz/test

6. This unit is divided into several sections. Start with the micro-lecture. Then proceed onto each section. You can click on a link below to navigate to the section where you had recently left off. Micro-Lecture Section 1: Introduction Section 2: Minimum Wage Section 3: Income Distribution Unit Summary & Assignment

7. View the Lecture (02:59) Read the Text of the Lecture

8. INTRODUCTION

9. A price control is a legal upper limit on price (a “price ceiling”) or a legal lower limit on price (a “price floor”). As we saw in the previous unit, free market competitive prices reflect information that helps people divert their resources and energies to the production and consumption of particular goods that are best for society to produce and consume. When the government imposes a price control, it prevents price from communicating this valuable information. Because people respond to incentives, the result is that society diverts resources so as to produce less than or more of goods than is socially optimal.

10. For example Suppose you are told that you will take an exam next week and that the exam will count for 50% of your course grade. The exam weight (50%) is a price. The price represents the benefit to you of devoting more of your resources toward studying (each 10% increase in your exam grade boosts your course grade by 5%). The price also represents the cost to you of diverting some of your resources away from studying (each 10% decline in your exam grade decreases your course grade by 5%).

11. For example In the end, you weigh the benefit of studying (a higher course grade) against the tradeoffs to studying (less time to spend with friends, to spend working, etc.). Understanding, the price of studying and being a human who responds to incentives, you decide how much of your resources to spend studying.

12. For example Now, suppose that when you arrive to take the exam, the professor tells you that he changed his mind and that the exam will not count for 50% of your course grade. Instead, it will count for 10% of your course grade. How do you feel? You will likely be angry. Had you known that the exam only counted for 10% of your course grade, you would have spent a little less time studying and a little more time doing other things.  The price of the exam (50%) did not reflect the true cost and benefit of studying (10%). Because of this, you studied too much.

13. For example Suppose instead that, when you arrive to take the exam, the professor tells you that he changed his mind and that the exam will not count for 50% of your course grade. Instead, it will count for 90% of your course grade. How do you feel? Again, you will likely be angry. Had you known that the exam counted for 90% of your course grade, you would have spent a little more time studying and a little less time doing other things.  The price of the exam (50%) did not reflect the true cost and benefit of studying (90%). Because of this, you studied too little.

14. Price controls have the same effect on consumers and firms that the last- minute change in the exam weight has on the student. When the government sets the price of a good, it is not setting the value of the good (remember, value is subjective). The result is that the price is no longer determined by the value people place on the good. As with the exam, if the government sets the price too high, the economy will produce too much of the product. If the government sets the price too low, the economy will produce too little of the product.

15. The intent of price controls is to provide relief to buyers by ensuring that prices do not rise above a certain point or support to sellers by ensuring that prices do not fall below a certain point. Prices are not levers that set value: they are metrics that respond to value. Price controls fail on three counts: legislating price does not legislate value, legislating price prevents price from signaling value, legislating price prevents prices from rationing scarce products.

16. All things are scarce. Prices ration scarce products by helping to ensure that products that are in the greatest need are not wasted and that they go to those whose need is most acute.

17. For example, suppose that there is an outbreak of malaria and that there is not enough malaria drug to treat everyone in the country. Without price controls, the price of the malaria drug will rise. This will cause two things to happen: Producers, seeing greater profit opportunities, will have greater incentive to import or produce more malaria drugs. This will make more of the drug available. People who have less need for the drug (perhaps they are not yet sick or live in an area where there have been no malaria cases) will have less incentive to buy the drug. This will leave more of the drug available for others with greater need.

18. But, suppose that government imposes a price ceiling on the drug so that the price cannot rise higher than it was before the malaria outbreak. With the price control, the price of the malaria drug will not rise. This will cause two things to happen: Producers, seeing no greater profit opportunity than before, will have no greater incentive than before to import or produce more malaria drugs. People who have less need for the drug (perhaps they are not yet sick or live in an area where there have been no malaria cases) will have incentive to buy the drug. This will leave less of the drug available for others with greater need. The result will be a shortage of the drug.

19. With the drug in short supply, how do we know who will get the drug and who will not? People who are family and friends of those who produce or import the drug will get the drug. People who hold politically powerful offices will get the drug. Notice that the drug will be rationed whether by the market when the price rises or by the government and producers when there is a price control.

20. The difference is that, when the market rations the drug, there is an incentive for the drug to go where it is most needed and there is an incentive for companies to produce more of the drug. When the government rations the drug, there is incentive for the drug to go to people who are well connected and there is little incentive for companies to produce more of the drug.

21. All things are scarce. Scarce resources will be rationed. The question is, by what mechanism? Who will be excluded?  Cap on interest rates? Rationed by risk. Loans will go to low-risk borrowers.  Cap on tuition? Rationed by talent. Seats will go to more talented students.  Minimum wage? Rationed by skill. Jobs will go to more skilled workers.

22. MINIMUM WAGE

23. The minimum wage is a price floor on labor. There are two equally correct interpretations of a minimum wage. 1.By law, the employer may not pay workers less than the minimum wage for their labor. 2.By law, the worker may not sell his labor for less than the minimum wage. The first interpretation appeals to some people’s sense of “social justice” in that it sounds like the law is protecting workers. The second interpretation should be offensive in that it sounds like the worker does not own his own labor. But, both interpretations are equally correct.

24. Suppose that workers are paid $5 per hour. In an attempt to help workers, the government imposes a $7 per hour minimum wage. Workers who have skills, experience, and educations that make their labor worth (to the employer) at least $7 per hour will keep their jobs. Workers who lack skills, experience, or education will not be worth (to the employer) $7 per hour. The employer will fire those workers.

25. Notice that the minimum wage really isn’t $5 per hour. The minimum wage is $0 per hour – that’s the wage of the fired worker. All the minimum wage does is to prevent the less skilled worker from offering his labor for sale. Notice that the minimum wage helped the skilled worker but at the expense of hurting the unskilled worker. Also notice that, in a competitive marketplace, if the skilled worker’s labor really is worth more $7 per hour, then employers will compete for the worker by offering higher wages. Over time, the skilled worker would have ended up earning $7 per hour without the help of the minimum wage.

26. In the following slides, you will see charts comparing the minimum wage in the United States to the unemployment rate. You will see that, as the minimum wage rises, unemployment among the college educated does not rise, unemployment among the high school educated rises a little, and unemployment among those without high school educations rises a lot.

27. For college graduates, there is (on average) no relationship between changes in the minimum wage and changes in the unemployment rate. Source: Statistical Abstract of the United States, and Bureau of Labor Statistics

28. For high-school graduates, each one-percentage point increase in the minimum wage is associated (on average) with a 0.4 percentage point increase in the unemployment rate.

29. Source: Statistical Abstract of the United States, and Bureau of Labor Statistics For those without high-school educations, each one-percentage point increase in the minimum wage is associated (on average) with a one- percentage point increase in the unemployment rate.

30. One of the errors people commit when thinking about a minimum wage is in assuming that the money to pay for the minimum wage comes from the firm. Ultimately, the money to pay for a minimum wage comes from people.

31. There are three ways in which a firm can find additional money to pay workers. 1.Layoff some workers and shift their wages to the remaining workers. 2.Keep all the workers and pay for the additional wages out of profits. 3.Keep all the workers and pay for the additional wages by raising prices.

32. Fire some workers and shift their wages to the remaining workers.  The minimum wage simply shifts money from some workers to other workers. The effect is to reduce the workers’ incentives to seek skills, experience, and education.

33. Fire no workers and pay for the minimum wage out of the firm’s profits.  The minimum wage simply shifts money from investors and entrepreneurs to workers. The effect is to reduce the incentive to create new businesses, products, and jobs.

34. Fire no workers and pay for the minimum wage by charging more for the firm’s product.  The minimum wage simply shifts money from consumers to workers. The effect is to reduce the incentive to buy the products that the workers produce.

35. But we have to do something about the distribution of income. The rich are getting richer while the poor get poorer!

36. INCOME DISTRIBUTION

37. In the following slides, you will see charts showing the distribution of income in the United States. You will see that, in free market economies, the rich do get richer: the chance for future wealth is the incentive for the rich to invest in creating new businesses, new products, and new jobs. You will also see that the poor get richer: the chance for future wealth is the incentive for the poor to work hard, and obtain skills, experience, and education.

38. Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. In 1980, 16% of US households earned less than $15,000. In 1980, 14% of US households earned between $15,000 and $25,000. In 1980, 17% of US households earned at least $75,000. % of Households in Each Income Bracket (2006$)

39. Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. By 1990, the number of US households earning less than $15,000 had fallen to 15%. By 1990, the number of US households earning between $15,000 and $25,000 had fallen to 13%. By 1990, the number of US households earning at least $75,000 had grown to 25%.

40. Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. By 2006, the number of US households in all income categories under $75,000 had shrunk while the number of households in income categories over $75,000 had increased. This result is after adjusting for the effects of inflation. What is undeniable is that, on average, the rich got richer and the poor got richer.inflation % of Households in Each Income Bracket (2006$)

41. Why do people say that, in free market economies, the poor get poorer over time?

42. These facts seem to imply that the poor got poorer because their share of the wealth fell from 66.6% to 65.4%. This statement, however, assumes that the wealth is constant – that economics is a zero-sum game rather than a positive-sum game. Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010. Fact In the US in 2001, the bottom 99% of people held 66.6% of all the wealth. In the US in 2007, the bottom 99% of people held 65.4% of all the wealth.

43. In 2001, total wealth in the US was $33.9 trillion. By 2007, total wealth in the US was (adjusted for inflation) $42.0 trillion. This means that, in 2001, the bottom 99% had wealth of (66.6%)($33.9 trillion) = $22.6 trillion. But, by 2007, the bottom 99% had wealth of (65.4%)($42.0 trillion) = $27.4 trillion. Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010. Fact In the US in 2001, the bottom 99% of people held 66.6% of all the wealth. In the US in 2007, the bottom 99% of people held 65.4% of all the wealth. That is a 20% increase in wealth – the poor got richer!

44. In this unit, you learned that prices are more than simply what one must pay for a product. Prices reflect information about the intensity with which consumers value products and the cost with which producers bring the goods to market. You also learned that, because all things are scarce, all products must be rationed, and that what is important is that the rationing mechanism result in products going to those who need them.

45. You learned that price controls fail because they prevent prices from signaling information about consumers’ intensity of need. Without this signaling information, products are rationed poorly. Rather than products going to those with the most intense need, products go to those who are well connected.

46. Read the following article, which is available on the JPIC 220 ERes site at the Gumberg Library. To access these articles, click on the links below. You may be prompted to enter a password ( JPIC ). Zachary, G. Pascal. ”Bags of Trouble: Korean Grocer Learns the Law Doesn’t Care About His Good Deeds." Wall Street Journal (Eastern Edition) 30 July 2006. ProQuest. Web. 22 June 2010.

47. After reading the Zachary article, post a two-paragraph response to the reading on the JPIC 220 Wiki.JPIC 220 Wiki Additionally, reply to at least two other students’ posts. Your replies may be comments, questions, shared stories, or any type of engaging response. HOW TO POST ONTO WIKI 1.Click on the Wiki discussion link above. 2.Sign into Wikispaces so that you are able to post via the “Sign In” link. 3.Type your response in the reply box at the bottom of the page

48. Individually, or in groups, pick a product for which the government imposes a price control and a product for which the government does not impose a price control. 1.What is the price of the regulated product and how has the price varied over time? 2.What is the price of the unregulated product and how has the price varied over time? 3.Assuming you have the money to pay for the product, how easy or hard is it to obtain the regulated product legally? 4.Assuming you have the money to pay for the product, how easy or hard is it to obtain the unregulated product? 5.Is there a black market for the regulated product? 6.Is there a black market for the unregulated product?

49. Inflation is an increase in the average price of all goods. Inflation causes money to be worth less because it takes more money to buy the same quantity of goods.