Transcript effective price ceiling

Chapter 6
Market intervention (I)
To begin with …
6.1 Price ceiling
6.2 Price floor
6.3 Quantity control: quota
1
Chapter 6
To begin with …
We have learned that:
The equilibrium price and quantity of a good are
determined by market demand and market supply in
a free market.
P
S
P0
0
D
Q0
Q
2
Chapter 6
To begin with …
In this chapter, we will study the situations under which the
government intervenes in the market.
Common types of government intervention
Price control
Price ceiling
Quantity control
Price floor
Quota
Unit tax
Unit subsidy
Scope of this chapter
3
Chapter 6
Task 6.1
A nuclear leak has occurred at
the nuclear plant of City J.
City H is close to City J. There
is a rumour that salt can prevent
radiation poisoning.
The price of salt has soared to
$1,000 per pack (100 g).
The government passes an
emergency act to ban sellers
selling salt from charging more
than $10 per pack.
City J
Price = $1,000 per pack
Price = $10 per pack
City H
4
Chapter 6
Task 6.1
Before the act, we could buy very little
salt because the price was so high.
Since the act has been passed, we
can still only buy very little salt
because now there’s a shortage.
A poor housewife
The government should not intervene
in the market!
Before the ban, I could buy salt easily.
Now it is difficult to get it!
A rich man who
is a salt lover
5
Chapter 6
Task 6.1
1. How has the act affected the salt retailing
market?
Total revenue?
Price, quantity transacted and total
revenue have all decreased.
6
Chapter 6
Task 6.1
2. Under such a circumstance, would you
support the act?
Economic reasons versus political reasons
7
Chapter 6
Task 6.1
3. Suppose you were the rich man. Try to think
of a method for getting the amount of salt
you want.
Free answer.
For example: Buying salt in the black
market at a higher price.
Can you suggest more methods?
8
Chapter 6
6.1 Price ceiling
9
Chapter 6
6.1 Price ceiling
 Maximum price allowed by the government
Why imposes a price ceiling?
Think about the case in ‘Task 6.1’.
 To ensure the public can consume some necessities
at affordable prices
 Example: Rent control from 1947 to 1998 in HK
10
Chapter 6
6.1 Price ceiling
Effective or not?
 Effective only if it is imposed below the equilibrium price
Which one is effective?
P
P
S
P1
P0
S
P0
P2
0
D
Q0
Fig. A
Q
0
D
Q0
Q
Fig. B
11
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.1
P
S
5
D
4
8
12 16
Q
20
Fig. 6.1
What are the equilibrium price and quantity?
The market equilibrium is achieved when the market quantity
demanded is equal to market quantity supplied at the same price.
The equilibrium quantity and price are 12 units and $3, respectively.
12
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.1
P
S
5
Price
ceiling
D
Q
4
8
12 16
20
Fig. 6.1
Suppose the government imposes a pricing ceiling of $2 on the
good. What will the new price and the new quantity transacted be?
As the maximum price ($2) is lower than the original equilibrium
price ($3), the price ceiling is effective.
Thus, the new price will be $2.
13
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8 = Qt
1
1
20
4
0
Table 6.1
P
S
5
Price
ceiling
D
Q
4
8
12 16
20
Fig. 6.1
At the controlled price of $2, Qd = 16 units and QS = 8 units.
Whenever Qd is not equal to QS, only the smaller of the two
quantities can be traded.
14
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8 = Qt
1
1
20
4
0
Table 6.1
P
S
5
Price
ceiling
D
Q
4
8
12 16
20
Fig. 6.1
At the controlled price ($2), Qd = 16 units and QS = 8 units.
Whenever
Qd is notprice
equalceiling
to QS, only
the smaller
of the two
When an effective
is imposed,
the quantity
quantities
be traded.
transactedcan
is equal
to the quantity supplied.
15
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.1
P
S
5
Price
ceiling
D
Q
Shortage
4
8
12 16
20
Fig. 6.1
At the controlled price ($2):
Qd > QS  Shortage
16
Chapter 6
B. Effects on total expenditure and
total revenue
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.1
P
S
5
A
B
4
8
Price
ceiling
D
Q
12 16
20
Fig. 6.1
The effective price ceiling leads to a movement along the
supply curve from Point A to Point B.
17
Chapter 6
B. Effects on total expenditure and
total revenue
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.1
P
S
5
A
B
4
8
Price
ceiling
D
Q
12 16
20
Fig. 6.1
Consumers’ total expenditure and producers’ total revenue:
Before the imposition of the
After the imposition of the
price ceiling
price ceiling
= $3 × 12 = $36
= $2 × 8 = $16
Decrease!
18
Chapter 6
Effects of an effective price ceiling
To conclude, an effective price ceiling has the
following effects:
1. The market price decreases.
2. A shortage or excess demand is created.
3. The quantity transacted decreases.
4. Producers’ total revenue (or consumers’
total expenditure) decreases.
Why must producers’ total revenue decrease
under an effective price ceiling?
Answers will be provided in the final version.
19
Chapter 6
Test yourself 6.1
Suppose the equilibrium price of a return air ticket between
Hong Kong and London is $10,000.
If the government does not allow airline companies to sell
the air ticket for more than $5,000, what effects will there
be on the price and quantity transacted of air tickets?
What will happen to the total revenue of airline companies?
20
Chapter 6
Test yourself 6.1 (con’t)
Answer:
The price of air tickets will decrease to $5,000. The
quantity transacted of air tickets will decrease . The total
revenue of airline companies will increase / decrease /
remain unchanged.
Price ($ / unit)
S
10,000
Maximum price
D
5,000
0
Q2
Q1
Quantity (units / period)
21
C. How to deal with a shortage that results
from a price ceiling
Chapter 6
Due to the excess demand under a effective
price ceiling, buyers have to compete with each
other by
1. non-price competition; or
2. price competition.
22
C. How to deal with a shortage that results
from a price ceiling
Chapter 6
1. Non-price competition among buyers
Buyers may need to meet certain criteria or use
other means to get the good, including
a. ‘first-come, first-served’ (queuing);
b. by luck (e.g., drawing lots);
c. by need; or
d. other criteria, such as producers’ preference,
friendship, age, height, etc.
23
C. How to deal with a shortage that results
from a price ceiling
Chapter 6
2. Price competition among buyers
a. Extra fees
Buyers may be asked to pay extra fee (legally or illegally)
before they buy the good.
Examples:
 Membership fee
 Entrance fee
 Key money
24
Chapter 6
C. How to deal with a shortage that results
from a price ceiling
2. Price competition among buyers
b. Black market
In a black market, goods are sold at prices higher than
the legal maximum.
P
In the previous example,
buyers are willing to pay up
to $4 per unit on the black
market at the quantity
transacted of 8 units.
S
5
4
3
2
Shortage
1
0
Price
ceiling
D
Q
4
8
12 16
20
25
Chapter 6
Learning tips 6.1 Ineffective price ceiling
A price ceiling is ineffective when it is imposed above
the equilibrium price.
 No effect on the price,
quantity transacted
and total revenue
P
S
P1
Pe
Price
ceiling
 No excess demand
Total
revenue
0
Qe
D
Q
26
Chapter 6
Learning tips 6.1 Ineffective price ceiling
A price ceiling is ineffective when it is imposed above
the equilibrium price.
 Suppose the price
ceiling is now set at
$4.
 As the price ceiling is
ineffective, the market
price and the quantity
transacted will stay at
$3 and 12 units.
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
3
12
12
2
16
8
1
20
4
Table 6.1
27
Chapter 6
Learning tips 6.1 Ineffective price ceiling
Real-life example: Tunnel tolls at the Western Harbor Tunnel
Effective from 31 July 2013
Vehicle
Gazetted toll
(HK$)
Actual toll
(HK$)
Motorcycles
90
25
Private cars
165
55
Taxis
165
50
Public and private
light buses
190
65
Table 6.2
Gazetted and actual tolls at the Western Harbour Tunnel
28
Chapter 6
Discuss 6.1
Why has the Hong Kong Government set an ineffective
price ceiling on tolls for the Western Harbour Tunnel?
Discuss in groups the possible reasons.
Back in the early 1990s, the Government wanted to
attract private companies to build and operate the
Western Harbour Tunnel, so it allowed the successful
company to raise tolls (i.e., the price ceiling) when the
actual revenue was below the forecast level. However,
the tunnel company noticed that its total revenue would
be maximised when the tolls are set below the price
ceiling (at the mid-point of the demand curve where the
demand elasticity is equal to one), hence the price
ceiling becomes ineffective.
29
Chapter 6
Test yourself 6.2
Based on the following diagrams, indicate the price,
quantity transacted and total revenue after the imposition
of a price ceiling.
b.
a.
P
P
S
S
Price
ceiling
P1
P0
P0
P1
0
Q1
Q0
Q2
Price
ceiling
D
Q
0
D
Q1
Q0
Q2
Q
30
Chapter 6
Learning tips 6.2
How does the change in demand or supply affect
the effectiveness of price ceiling?
Suppose the government has imposed an effective price
ceiling. The price ceiling will become ineffective if the
equilibrium price drops below the maximum price allowed.
P
This can be caused by:
(a) A decrease in demand
S
P1
Pe
Price
ceiling
D1
0
D2
Qe Q1
Q
31
Chapter 6
Learning tips 6.2 (con’t)
How does the change in demand or supply affect
the effectiveness of price ceiling?
Suppose the government has imposed an effective price
ceiling. The price ceiling will become ineffective if the
equilibrium price drops below the maximum price allowed.
P
This can be caused by:
(b) An increase in supply
S1
S2
P1
Pe
0
Price
ceiling
D
Q1
Qe
Q
32
Chapter 6
Economics at work 6.1
Effects of rent control on residential units
Hong Kong had a rent control before
1999. This resulted in excess demand
of rental units.
Non-price methods had to be used to
allocate the limited number of rental
units.
For example, allocation may be based
on tenants’ family status or jobs.
Some landlords require key money
before tenants get a rental contract.
Fig. 6.7 Under rent control,
conditions in residential units
tend to deteriorate.
33
Chapter 6
Economics at work 6.1 (con’t)
Effects of rent control on residential units
Other effects of rent control:
 Tenants are reluctant to move out.
 Landlords have little incentive to maintain their flats.
Conditions in the flats deteriorate.
34
Chapter 6
Test yourself 6.3
Does rent control imposed on old private residential flats
benefit the tenants? Explain with the aid of a diagram.
Answer:
Tenants who have already rented their flats can / cannot
benefit from rent control as they now pay a lower / higher
rent.
P
S
Pe
P1
Price ceiling
Excess demand
0
D
Q1
Qe
Q2
Q
35
Chapter 6
Test yourself 6.3 (con’t)
Does rent control imposed on old private residential flats
benefit the tenants? Explain with the aid of a diagram.
Answer:
However, since landlords are more / less willing to rent
out their flats, potential tenants can rent flats more / less
easily.
Potential tenants have to engage in __________________
non-price competition
and even pay a higher / lower black market rent to landlords.
Therefore, potential tenants may not benefit from rent
control.
36
Chapter 6
Test yourself 6.3 (con’t)
Does rent control imposed on old private residential flats
benefit the tenants? Explain with the aid of a diagram.
Answer:
Since rent control limits the rental income received by
landlords, they lack an incentive to maintain the quality of
their flats. So, there will be deterioration in the quality of
rental flats in the market. Therefore, tenants as a whole
suffer from a decrease in the quality of rental flats.
37
Chapter 6
Test yourself 6.4
a. Apart from family status and income status, suggest
TWO other methods for allocating the limited number of
rental units under rent control.
Answer:
 first-come, first-served
 relationships or friendships with landlords
 age
 any other possible reasons
38
Chapter 6
Test yourself 6.4 (con’t)
b. If there is rent control, what effect would this have on the
turnover rate of rental units? Explain your answer.
Answer:
Under rent control, _______
shortage of private rental units exists.
The tenants are paying a rent which is higher / lower than
the equilibrium level. They are _______
reluctant to move out.
Therefore, the turnover rate will increase / decrease.
39
Chapter 6
Discuss 6.2
In recent years, as the rent for private residential
housing has risen rapidly, more and more people have
urged the Hong Kong Government to impose rent
controls again. Discuss in groups the pros and cons of
imposing rent controls on private residential housing.
Pros:
Cons:
 The poor can pay a lower
 A shortage of rental
rent
 To the tenants, landlords
cannot charge excessive
rents
 Fairer to the tenants
housing units
 Landlords will lack
incentives to maintain
the buildings
 Infringe private
property rights
40
Chapter 6
Past exam Q
1. Suppose the government imposed an effective price
ceiling on good X. If the government raises the price
ceiling, the total consumer expenditure on good X
A.
B.
C.
D.
would increase.
would decrease.
would remain unchanged.
may increase, decrease or remain unchanged
depending on the elasticity of demand.
(HKCEE 2009, Q8)
41
Chapter 6
Past exam Q
2. Suppose the government introduces an effective rent control
which sets a maximum rental per square feet the landlords can
charge to any tenants. Which of the following statements is
correct?
(1) There will be a shortage of rental units.
(2) The landlords will have less incentive to rent out their
flats.
(3) The landlords will spend less on maintenance of the
rental flats.
A.
B.
C.
D.
(1) and (2) only
(1) and (3) only
(2) and (3) only
(1), (2) and (3)
(HKDSE 2013, Q15)
42
Chapter 6
6.2 Price floor
43
Chapter 6
Task 6.2
There are many rice farmers in
Country T. Due to the country’s
abundant supply of rice, the
market price is low.
In order to protect the income of
rice farmers, the government has
set a minimum price which is
above the market price for rice.
Consumers must pay at or above
the minimum price to buy rice.
Country T
44
Chapter 6
Task 6.2
A consumer
With the price limit, I can’t
buy rice as cheaply as before.
So, I’m consuming more of
other types of staple food
and less rice now.
I’m not sure whether the limit
can help me. I can’t sell as
much as I produce.
A rice farmer
45
Chapter 6
Task 6.2
1. Why can’t the farmer sell as much as he
produces when there is a price limit?
When the price is set higher than the
equilibrium, the quantity demanded of
rice will be smaller than the quantity
supplied.
46
Chapter 6
Task 6.2
2. As a consumer, would you support the price
limit?
Price?
Free answer. Suggested answer:
No, I need to pay higher price.
47
Chapter 6
Task 6.2
3. As a rice farmer, would you support the
price limit?
Total revenue?
Free answer. Suggested answer:
Yes, only if I can sell rice at the higher
price. If there is a surplus, some farmers
may not be able to sell their products and
their total revenue may fall (which
depends on price elasticity of demand)
48
Chapter 6
6.2 Price floor
 Minimum price allowed by the government
Why imposes a price floor?
 To protect the income of some parties or to
encourage local production.
 Example: Minimum wage in Hong Kong
49
Chapter 6
6.2 Price floor
Effective or not?
 Effective only if it is imposed above the equilibrium price
Which one is effective?
P
P
S
P1
P0
S
P0
P2
0
D
Q0
Fig. A
Q
0
D
Q0
Q
Fig. B
50
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.3
P
S
5
D
Q
4
8
12 16
20
Fig. 6.10
Again, the original quantity and price are 12 units and $3,
respectively.
51
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.3
P
S
5
Price
floor
D
Q
4
8
12 16
20
Fig. 6.10
Suppose the government imposes a pricing floor of $4 on the good.
What will the new price and the new quantity transacted be?
As the minimum price ($4) is higher than the original equilibrium
price ($3), the price floor is effective.
The new price will be $4.
52
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8 = Qt
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.3
P
S
5
Price
floor
D
Q
4
8
12 16
20
Fig. 6.10
At the controlled price ($4), Qd = 8 units and QS = 16 units.
Whenever Qd is not equal to QS, only the smaller of the two
quantities can be traded.
When an effective price floor is imposed, the quantity
transacted is equal to the quantity demanded.
53
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.3
P
5
Surplus
S
Price
floor
D
Q
4
8
12 16
20
Fig. 6.10
At the controlled price of $4:
Qd < QS  Surplus
54
Chapter 6
B. Effects on total expenditure and
total revenue
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.3
P
S
5
C
Price
floor
A
D
Q
4
8
12 16
20
Fig. 6.10
The effective price ceiling leads to a movement along the
demand curve from Point A to Point C.
55
Chapter 6
B. Effects on total expenditure and
total revenue
Price
($ / unit)
Market Qd
(units / week)
Market QS
(units / week)
5
4
20
4
8
16
4
3
3
12
12
2
2
16
8
1
1
20
4
0
Table 6.3
P
S
5
C
Price
floor
A
D
Q
4
8
12 16
20
Fig. 6.10
Consumers’ total expenditure and producers’ total revenue:
Before the imposition of the
After the imposition of the
price floor
price floor
= $3 × 12 = 36
= $4 × 8 = 32
In this case, both TE and TR decrease.
56
Chapter 6
B. Effects on total expenditure and
total revenue
The effect of a price floor on total revenue depends on
the elasticity between the original price and the
minimum price:
If demand is inelastic
(i.e., Ed < 1),
then total revenue
will increase.
P
Gain
>
Loss
S
P2
P1
Price
floor
D
0
Q2 Q1
Q
57
Chapter 6
B. Effects on total expenditure and
total revenue
The effect of a price floor on total revenue depends on
the elasticity between the original price and the
minimum price:
If demand is elastic
(i.e., Ed > 1),
then total revenue
will decrease.
P
Gain
Loss
<
S
P2
Price
floor
P1
D
0
Q2 Q1
Q
58
Chapter 6
B. Effects on total expenditure and
total revenue
The effect of a price floor on total revenue depends on
the elasticity between the original price and the
minimum price:
If demand is unitarily
elastic (i.e., Ed = 1),
then total revenue will
remain unchanged.
P
Gain
=
Loss
S
P2
Price
floor
P1
D
0
Q2 Q1
Q
59
Chapter 6
Effects of an effective price floor
To conclude, an effective price floor has the
following effects:
1. The market price increases.
2. A surplus or excess supply is created.
3. The quantity transacted decreases.
4. Producers’ total revenue (or consumers’ total
expenditure) may increase, decrease or remain
unchanged. This depends on the elasticity of
demand between the original equilibrium price
and the minimum price.
60
Chapter 6
Test yourself 6.5
Suppose the equilibrium price of a return air ticket between
Hong Kong and London is $10,000.
If the government does not allow airline companies to sell
the air ticket for less than $15,000, what effects will this
have on the price and quantity transacted of air tickets?
What will happen to the total revenue of airline companies?
61
Chapter 6
Test yourself 6.5 (con’t)
Answer:
The price of air tickets will increase to $15,000. The quantity
transacted of air tickets will decrease . The total revenue of
airline companies may increase, decrease or remain
unchanged, depending on the price elasticity of demand.
Price ($ / unit)
S
15,000
Minimum price
10,000
D
0
Q2
Q1
Quantity (units / period)
62
C. How to deal with the surplus that results
from a price floor
Chapter 6
Due to the excess supply under a effective price
floor, sellers have to compete with each other by
1. non-price competition; or/and
2. price competition.
63
C. How to deal with the surplus that results
from a price floor
Chapter 6
1. Non-price competition among sellers
Sellers may need to meet certain criteria or use other
means to sell their good, including
a. Improving the quality of goods;
b. Providing extra gifts or services;
c. other criteria, such as buyers’ preference, friendship,
seniority, height, strength, etc.
For example, when a minimum wage is imposed, workers
(especially the low-skilled) have to invest more resources
to acquire more skills, e.g., attending training courses.
64
C. How to deal with the surplus that results
from a price floor
Chapter 6
2. Price competition among sellers
a. Extra fees
Sellers may be asked to pay buyers (or middlemen)
legally or illegally an extra fee in order to have
priority over others in selling their goods.
65
Chapter 6
C. How to deal with the surplus that results
from a price floor
2. Price competition among sellers
b. Illegal price cutting (or illegal price concession)
Suppliers may sell their goods at prices lower than
the legal minimum.
In the previous example,
suppliers are willing to sell
illegally at $2 per unit when
the quantity transacted is 8
units.
P
5
Surplus
S
Price
floor
4
3
2
1
0
D
Q
4
8
12 16
20
66
Chapter 6
Learning tips 6.3
Ineffective price floor
A price floor is ineffective when it is imposed below
the equilibrium price.
 No effect on the price,
quantity transacted
and total revenue
 No excess supply
P
S
Pe
P1
0
Total
revenue
Qe
Price
floor
D
Q
67
Chapter 6
Test yourself 6.6
Based on the following diagrams, indicate the price,
quantity transacted and total revenue after the imposition
of a price floor.
b.
a.
P
P
S
S
Price
floor
P0
P1
P1
Price
floor
P0
0
D
Q0
Q1
Q2
Q
0
D
Q0
Q1
Q2
Q
68
Chapter 6
Test yourself 6.7
With reference to ‘Learning tips 6.2’, explain how the
change in demand or supply affects the effectiveness of
price floor.
69
Chapter 6
Test yourself 6.7 (con’t)
Answer:
When there is an increase in demand or a decrease in supply,
the price floor will become ineffective if the new equilibrium
price is higher than the minimum price imposed.
This can be caused by:
(a) A increase in demand
P
(b) A decrease in supply
P
S
Pe
P1
Price
floor
S2
S1
Pe
P1
Price
floor
D2
0
D1
Q1
Qe
Q
0
D
Qe
Q1
Q
70
Chapter 6
Economics at work 6.2
Exploitation of workers under the minimum wage
The minimum wage law was implemented in Hong Kong
on 1 May 2011. After the implementation, cases of worker
exploitation, especially of older workers, were occasionally
discovered.
Excess supply of labour exists in some industries.
Employers tend to hire younger workers with more
skills and higher productivity.
To avoid losing their jobs to younger workers, some
older and low-skilled workers are forced to accept
wages that are lower than the statutory minimum
level.
71
Chapter 6
Economics at work 6.2 (con’t)
Exploitation of workers under the minimum wage
72
Chapter 6
Test yourself 6.8
Can a minimum wage law help low-wage, unskilled
workers in Hong Kong to earn a larger total income?
Explain with the aid of a diagram.
Answer:
A minimum wage will raise / reduce
employment of workers. Workers
who can still secure employment
after the introduction of the minimum
wage would benefit / suffer from the
higher / lower wage rate.
P
S
Surplus
P1
Minimum
wage
Pe
0
D1
Q1
Qe
Q2
Q
73
Chapter 6
Test yourself 6.8 (con’t)
Can a minimum wage law help low-wage, unskilled
workers in Hong Kong to earn a larger total income?
Explain with the aid of a diagram.
Answer:
However, since the minimum
wage creates an excess
demand / supply of labour
(Q2 – Q1), employers can be
more selective in choosing
employees. They tend to
employ workers with more
skills and higher productivity.
Some workers, mainly those
who are unskilled or with lower
productivity, are unemployed.
P
S
Surplus
P1
Minimum
wage
Pe
0
D1
Q1
Qe
Q2
Q
74
Chapter 6
Test yourself 6.8 (con’t)
Answer:
Moreover, workers must compete among themselves
to be employed. They have to engage in non-price
competition (e.g., attending self-financed training
courses). Some workers may need to agree to an
illegal wage cut proposed by employers to become
employed. Therefore, potential employees may not
benefit from the minimum wage.
75
Chapter 6
Test yourself 6.9
Why are old watchmen and exploited domestic helpers
willing to receive wages lower than the statutory minimum?
Answer:
They are afraid of losing their jobs to young workers. Old
workers can easily / hardly get recruited when they are
unemployed.
76
Chapter 6
Discuss 6.3
Some employers offer to pay their watchmen or foreign
domestic helpers wages that are higher than the
statutory minimum. Why would this happen? Is it just
because those employers are kind to their employees?
Free answer.
Perhaps these employers find that the workers are
more productive and deserve a wage higher than the
statutory minimum.
Any other reasons?
77
Chapter 6
Discuss 6.4
There is only one minimum wage for all sectors in Hong
Kong. Discuss in which sectors the minimum wage is
most likely to be effective and how it affects those
sectors.
Free answer.
It is most likely that the minimum wage is effective
for cleaning and security industries. Since cleaners
and watchmen are unskilled, employers will pay lower
wages to them if there is no minimum wage law.
78
Chapter 6
Past exam Q
3.
Refer to the above diagram. Which of the following statements is
correct?
A. If a price ceiling is set at P1, the quantity transacted is Q3.
B. If a price floor is set at P1, the quantity transacted is Q2.
C. If a price floor is set at P3, the quantity transacted is Q2.
D. If a price ceiling is set at P3, non-price competition will occur.
(HKCEE 2004, Q12)
79
Chapter 6
Past exam Q
4. Suppose in Hong Kong there is
an excess supply of Filipina
domestic helpers at the minimum
wage (w) set by the government.
Also suppose that recently Hong
Kong employers have to
purchase an additional insurance
policy for newly hired Filipina
domestic helpers. Which of the
diagrams on the right correctly
reflects the above situation in the
Filipina domestic helpers market
in Hong Kong?
(HKCEE 2011, Q7)
80
Chapter 6
6.3 Quantity control: quota
81
Chapter 6
Task 6.3
Traffic congestion is serious in
Beijing.
Starting from 2011, the Beijing
government has set a limit on
the number of new vehicle
licences issued each month in
an effort to solve the problem.
京 A • 20000
82
Chapter 6
Task 6.3
Mr Chen
I want to buy a new car. The
number of new vehicle licences
issued per month is 20,000 but
there are more than 50,000
applications. We need to wait for
the result from the drawing of lots.
The number of new
vehicles transacted has
decreased greatly.
What should I do?
Miss Li (Car agent)
83
Chapter 6
Task 6.3
1. Since the new policy, in which form of
competition has Mr Chen engaged?
He has engaged in non-price competition.
84
Chapter 6
Task 6.3
2. What should Miss Li do to raise her revenue
from selling cars?
85
Chapter 6
Task 6.3
3. Suggest other methods that can reduce the
number of new private cars on the roads.
 Raising the first registration fee
 Increasing annual licence fee
 Raising fuel tax
 Introducing electronic-road pricing
Many other ways!
86
Chapter 6
6.3 Quota
 Maximum amount of output that the government allows
Why imposes a quota?
 Many reasons.
For example:
 ‘Two-can limit’ on baby formula to deal
with milk shortage fear.
 Restricted number of taxis and minibuses
to reduce traffic congestion.
87
Chapter 6
6.3 Quota
Effective or not?
 Effective only if it is imposed below the equilibrium quantity
Which one is effective?
P
P
S
P0
0
S
P0
D
Q0
Fig. A
Q
0
D
Q0
Q
Fig. B
88
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units /
week)
Market QS
(units /
week)
5
4
20
4
8
16
3
12
12
2
16
8
1
20
4
Table 6.4
P
S
5
4
3
2
1
0
D
Q
4
8
12 16
20
Fig. 6.16
Again, the original quantity and price are 12 units and $3,
respectively.
89
Chapter 6
A. Effects on price and quantity
Price
($ / unit)
Market Qd
(units /
week)
Market QS
(units /
week)
Market QS
under quota
(units / week)
5
4
20
8
4
8
16
8
3
12
12
8
2
16
8
8
1
20
4
4
Table 6.4
P
S’
S
5
4
3
2
1
0
D
Q
4
8
12 16
20
Fig. 6.16
Suppose the government imposes a quota of 8 units on the good.
What will the new price and the new quantity transacted be?
The maximum amount the producers can sell is only 8 units.
The supply curve becomes kinked.
The new price and the new quantity transacted will be $4 and 8
units, respectively.
90
Chapter 6
B. Effects on total expenditure and
total revenue
Price
($ / unit)
Market Qd
(units /
week)
Market QS
(units /
week)
Market QS
under quota
(units / week)
5
4
20
8
4
8
16
8
3
12
12
8
2
16
8
8
1
20
4
4
Table 6.4
P
S’
S
5
H
4
3
A
2
1
0
D
Q
4
8
12 16
20
Fig. 6.16
The effective quota leads to a movement along the demand
curve from Point A to Point H.
91
Chapter 6
B. Effects on total expenditure and
total revenue
Price
($ / unit)
Market Qd
(units /
week)
Market QS
(units /
week)
Market QS
under quota
(units / week)
5
4
20
8
4
8
16
8
3
12
12
8
2
16
8
8
1
20
4
4
P
S’
S
5
H
4
3
A
2
1
0
D
Q
4
8
12 16
20
Fig. 6.16
Table 6.4
Consumers’ total expenditure and producers’ total revenue:
Before the imposition of the
After the imposition of the
quota
quota
= $3 × 12 = 36
= $4 × 8 = 32
In this case, TE and TR decrease.
92
B. Effects on total expenditure and
total revenue
Chapter 6
The effect of a quota on total revenue depends on the
elasticity of demand between the original
equilibrium price and the new market price:
 If demand is inelastic (i.e., Ed < 1),
then total revenue will increase.
 If demand is elastic (i.e., Ed > 1),
then total revenue will decrease.
 If demand is unitarily elastic (i.e., Ed = 1),
then total revenue will remain unchanged.
93
Chapter 6
C. Effect on quality
A producer may need to pay a price to obtain a quota right.
Both the prices of higher quality goods and lower quality goods
increase by the same amount.
How does the price of a higher quality good relative to the price of
a lower quality good change?
Before the imposition of quota:
Relative price of a
Price of a higher quality good
higher quality good = Price of a lower quality good
After the imposition of quota:
Relative price of a
Price of a higher quality good + Price of quota right
higher quality good = Price of a lower quality good + Price of quota right
The price of a higher quality good relative to the price of a lower
quality good will decrease.
94
Chapter 6
C. Effect on quality
As the relative price of a higher quality good decreases,
relatively more higher quality goods will be consumed.
Thus, when an effective quota is imposed, the average
quality of the good will improve.
95
Chapter 6
Effects of an effective quota
To conclude, an effective quota has the following effects:
1. The quantity transacted decreases.
2. The market price increases.
3. Producers’ total revenue (or consumers’ total
expenditure) may increase, decrease or remain
unchanged. This depends on the elasticity of demand
between the original equilibrium price and the new
selling price.
4. It leads to an improvement in product quality.
96
Chapter 6
Test yourself 6.10
What effects will there be on the price and quantity
transacted of private cars if the Hong Kong Government
imposes an effective quota on imported cars? What about
its effects on the quality of imported cars in Hong Kong?
Answer:
The price will increase / decrease.
The quantity transacted will increase / decrease.
The quality will improve.
97
Chapter 6
Test yourself 6.11
With reference to ‘Learning tips 6.2’, explain how the
change in demand or supply affects the effectiveness
of quota.
98
Chapter 6
Test yourself 6.11 (con’t)
Answer:
When there is a decrease in demand or a decrease in supply,
the quota will become ineffective if the new equilibrium quantity
is lower than the quota imposed.
This can be caused by:
(a) A decrease in demand
P
(b) A decrease in supply
P
Sq
Sq
P1
P2
P1
Pe
D1
0
D2
Qe Q1
Q
S2
0
S1
D
Q2 Q1
Q
99
Chapter 6
Learning tips 6.4 Ineffective quota
A quota is ineffective when it is imposed above the
equilibrium quantity.
 No effect on the price,
quantity transacted
and total revenue
Price
Market Qd
($ / unit) (units / week)
5
4
Total
revenue
16
8
16
3
12
12
2
16
8
1
20
4
S1
Pe
Market QS
Under quota
(units / week)
4
S2
P
0
Fig. 6.17
Table 6.5
D
Qe
Q
An ineffective quota
A quota of 16 units per week on Good X
100
Chapter 6
Past exam Q
5. Refer to the following demand and supply schedules of Good X.
Unit price ($)
Quantity demanded (Units)
Quantity supplied (Units)
100
90
80
70
60
50
80 100 120 140 160 180
200 160 120
80
60
40
If the government fixes the production quota of Good X at 80 units,
the total expenditure of consumers on the good will be ________.
A.
B.
C.
D.
$5,600
$6,400
$8,000
$9,600
(HKCEE 2011, Q13)
101
Chapter 6
Past exam Q
6. In Country A, there is a quota restriction on an imported good.
When the import quota quantity is Q1, the market price of the
good is P1.
Now suppose Country A increases the quota quantity from Q1
to Q3 as shown in the diagram below. As a result, the new
total sales revenue would be
A.
B.
C.
D.
P1 × Q1
P2 × Q2
P1 × Q3
P3 × Q3
(HKCEE 2006, Q10)
102
Chapter 6
Past exam Q
7. Last year, the government reduced the import quota of fresh
chicken into Hong Kong. On the other hand, many Hong Kong
citizens have changed their habit of consuming fresh chicken to
consuming chilled chicken. Which of the following diagrams
illustrates this phenomenon?
(HKCEE 2009, Q12)
103