General Instructions – PLEASE READ THEM CAREFULLY
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The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
plagiarism).
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Chapter 4 & 6: Case Study: Supply, Demand, and Market Equilibrium:
In the first assignment for the Macroeconomics course, the students are required to choose a specific area from
the subject and answer the questions given, upon successful completion of the assignment; the student should
be able to achieve the following learning outcomes:
Learning Outcomes:
1. Define the institutional framework of macroeconomic policymaking. [CLO 1.1]
2. Analyze economic problems within the conceptual framework of mainstream macroeconomics.
[CLO 2.1]
Reference Source:
Textbook: – Mankiw, N. Gregory. Principles of Macroeconomics, 6th ed. Mason, OH: South-Western
Cengage Learning, 2011. ISBN: 9780538453066 (hard copy); ISBN: 9781115468523 (eBook)
Case Study:1
Please read the case “Two Ways to Reduce the Quantity of Smoking Demanded” from Chapter 4
“Supply, Demand, and Market Equilibrium” Page: – 71 given in your textbook – “Principles of
Macroeconomics”. The case study presented in the chapter discussed cigarette taxes as a way to reduce
smoking. Now think about the markets for other tobacco product such as cigars and chewing tobacco. and
Answer the following Questions:
Questions:
1.1. Are these goods substitutes or compliments for cigarettes? (100 – 150 words – 1.25 point)
1.2.Using a supply and demand diagram, show what happens in the markets for cigars and chewing
tobacco if the tax on cigarettes is increased. (100 – 150 words – 1.25 point)
1.3.If policy makers wanted to reduce total tobacco consumption, what policies could they combine
with the cigarette tax? (100 – 150 words – 1.25 point)
1.4.How can we reduce the consumption of cigarettes in economics? (100 – 150 words – 1.25 point)
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Case Study:2 (5 Points)
Please read the case “The Minimum Wage” from Chapter 6 “Supply, Demand, and Government
Policies” Page: – 117 given in your textbook – “Principles of Macroeconomics”. A case study
discusses the federal minimum-wage law.
Questions:
2.1.Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor.
Using a supply and-demand diagram of the market for unskilled labor, show the market wage,
the number of workers who are employed, and the number of workers who are unemployed.
Also show the total wage payments to unskilled workers. (100 – 150 words – 1.25 point)
2.2.Now suppose the secretary of labor proposes an increase in the minimum wage. What effect
would this increase have on employment? Does the change in employment depend on the
elasticity of demand, the elasticity of supply, both elasticities, or neither? (100 – 150 words –
1.25 point)
2.3.What effect would this increase in the minimum wage have on unemployment? Does the change
in unemployment depend on the elasticity of demand, the elasticity of supply, both elasticities, or
neither? (100 – 150 words – 1.25 point)
2.4.If the demand for unskilled labor were inelastic, would the proposed increase in the minimum
wage raise or lower total wage payments to unskilled workers? Would your answer change if the
demand for unskilled labor were elastic? (100 – 150 words – 1.25 point)
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Answer:
118
PART II
HOW MARKETS WORK
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 minimums than the United States.
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 sub-
ject 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 to balance labor supply and labor demand.
Panel (b) 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, the
minimum wage raises the 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. The impact of the minimum wage depends on the skill and experience of
the worker. Highly skilled and experienced workers are not affected 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 for teenage labor.
The 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
teenagers are willing to work as “interns” for no pay at all. Because internships
pay nothing, however, the minimum wage does not apply to them. If it did, these
Figure 5
How the Minimum Wage
Affects the Labor Market
Panel (a) shows a labor market in which the wage adjusts to balance labor supply
and labor demand. Panel (b) shows the impact of a binding minimum wage. Because
the minimum wage is a price floor, it causes a surplus: The quantity of labor supplied
exceeds the quantity demanded. The result is unemployment.
(a) A Free Labor Market
(b) A Labor Market with a Binding Minimum Wage
Wage
Wage
Labor
supply
Labor
supply
Labor surplus
(unemployment)
Minimum
wage
Equilibrium
wage
Labor
demand
Labor
demand
0
0
Equilibrium
employment
Quantity of
Labor
Quantity
demanded
Quantity
supplied
Quantity of
Labor
CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES
117
Figure 4
In panel (a), the government imposes a price floor of $2. Because this is below the
equilibrium price of $3, the price floor has no effect. The market price adjusts to
balance supply and demand. At the equilibrium, quantity supplied and quantity
demanded both equal 100 cones. In panel (b), the government imposes a price floor
of $4, which is above the equilibrium price of $3. Therefore, the market price equals
$4. Because 120 cones are supplied at this price and only 80 are demanded, there is a
surplus of 40 cones.
A Market with a Price
Floor
(a) A Price Floor That Is Not Binding
(b) A Price Floor That Is Binding
Price of
Ice-Cream
Cone
Price of
Ice-Cream
Cone
Supply
Supply
Surplus
Equilibrium
price
$4
Price
floor
$3
X
Price
floor
2
Equilibrium
price
Demand
Demand
0
0
100
Equilibrium
quantity
Quantity of
Ice-Cream
Cones
80
Quantity
demanded
120
Quantity
supplied
Quantity of
Ice-Cream
Cones
the floor, the price floor is a binding constraint on the market. The forces of sup-
ply 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.
CASE
STUDY
The Minimum Wage
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 Labor Standards Act
of 1938 to ensure workers a minimally adequate standard of living. In 2009,
the minimum wage according to federal law was $7.25 per hour. (Some states
Copyright 2011 Cengage Leaming. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall leaming experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER 4
THE MARKET FORCES OF SUPPLY AND DEMAND
71
Expectations Your expectations about the future may affect your demand for
a good or service today. If you expect to earn a higher income next month, you
may choose to save less now and spend more of your current income buying ice
cream. If you expect the price of ice cream to fall tomorrow, you may be less will-
ing to buy an ice-cream cone at today’s price.
Number of Buyers In addition to the preceding factors, which influence the
behavior of individual buyers, market demand depends on the number of these
buyers. If Peter were to join Catherine and Nicholas as another consumer of ice
cream, the quantity demanded in the market would be higher at every price, and
market demand would increase.
Summary The demand curve shows what happens to the quantity demanded of
a good when its price varies, holding constant all the other variables that influence
buyers. When one of these other variables changes, the demand curve shifts. Table
1 lists the variables that influence how much consumers choose to buy of a good.
If you have trouble remembering whether you need to shift or move along the
demand curve, it helps to recall a lesson from the appendix to Chapter 2. A curve
shifts when there is a change in a relevant variable that is not measured on either
axis. Because the price is on the vertical axis, a change in price represents a move-
ment along the demand curve. By contrast, income, the prices of related goods,
tastes, expectations, and the number of buyers are not measured on either axis, so
a change in one of these variables shifts the demand curve.
CASE Two Ways to Reduce the Quantity
STUDY
of Smoking Demanded
Public policymakers often want to reduce the amount that people smoke because
of smoking’s adverse health effects. There are two ways that policy can attempt
to achieve this goal.
One way to reduce smoking is to shift the demand curve for cigarettes and other
tobacco products. Public service announcements, mandatory health warnings on
cigarette packages, and the prohibition of cigarette advertising on television are
all policies aimed at reducing the quantity of cigarettes demanded at any given
price. If successful, these policies shift the demand curve for cigarettes to the left,
as in panel (a) of Figure 4.
ACESTOCK/ACE STOCK LIMITED/ALAMY
What is the best way
to stop this?
Table 1
Variable
Price of the good itself
Income
Prices of related goods
Tastes
Expectations
Number of buyers
A Change in This Variable …
Represents a movement along the demand curve
Shifts the demand curve
Shifts the demand curve
Shifts the demand curve
Shifts the demand curve
Shifts the demand curve
Variables That Influence Buyers
This table lists the variables that
affect how much consumers choose
to buy of any good. Notice the
special role that the price of the
good plays: A change in the good’s
price represents a movement
along the demand curve, whereas
a change in one of the other
variables shifts the demand curve.
Copyright 2011 Cengage Leaming. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall leaming experience. Cengage Leaming reserves the right to remove additional content at any time if subsequent rights restrictions require it.
72
PART II
HOW MARKETS WORK
Figure 4
Shifts in the Demand
Curve versus Movements
along the Demand Curve
If warnings on cigarette packages convince smokers to smoke less, the demand curve
for cigarettes shifts to the left. In panel (a), the demand curve shifts from D, to Dz. At
a price of $2.00 per pack, the quantity demanded falls from 20 to 10 cigarettes per
day, as reflected by the shift from point A to point B. By contrast, if a tax raises the
price of cigarettes, the demand curve does not shift. Instead, we observe a movement
to a different point on the demand curve. In panel (b), when the price rises from $2.00
to $4.00, the quantity demanded falls from 20 to 12 cigarettes per day, as reflected by
the movement from point A to point C.
(a) A Shift in the Demand Curve
(b) A Movement along the Demand Curve
Price of
Cigarettes,
Price of
Cigarettes,
per Pack
A policy to discourage
smoking shifts the
demand curve to the left.
per Pack
A tax that raises the price
of cigarettes results in a
movement along the
demand curve.
$4.00
B
$2.00
2.00
D
D
D2
0
10+
20
0
12+
20
Number of Cigarettes Smoked per Day
Number of Cigarettes Smoked per Day
Alternatively, policymakers can try to raise the price of cigarettes. If the gov-
ernment taxes the manufacture of cigarettes, for example, cigarette companies
pass much of this tax on to consumers in the form of higher prices. A higher price
encourages smokers to reduce the numbers of cigarettes they smoke. In this case,
the reduced amount of smoking does not represent a shift in the demand curve.
Instead, it represents a movement along the same demand curve to a point with a
higher price and lower quantity, as in panel (b) of Figure 4.
How much does the amount of smoking respond to changes in the price of
cigarettes? Economists have attempted to answer this question by studying what
happens when the tax on cigarettes changes. They have found that a 10 percent
increase in the price causes a 4 percent reduction in the quantity demanded.
Teenagers are found to be especially sensitive to the price of cigarettes: A 10 per-
cent increase in the price causes a 12 percent drop in teenage smoking.
A related question is how the price of cigarettes affects the demand for illicit
drugs, such as marijuana. Opponents of cigarette taxes often argue that tobacco
and marijuana are substitutes so that high cigarette prices encourage marijuana
use. By contrast, many experts on substance abuse view tobacco as a “gateway
drug” leading the young to experiment with other harmful substances. Most stud-
ies of the data are consistent with this latter view: They find that lower cigarette
prices are associated with greater use of marijuana. In other words, tobacco and
marijuana appear to be complements rather than substitutes.
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall leaming experience. Cengage Leaming reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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