Applications of Demand and Supply

Read this chapter and attempt the "Try It" exercises. This chapter will help you gain familiarity and competencies with regard to basic demand and supply concepts. At a minimum, you should be able to list the factors that shift the demand curve and those that shift the supply curve after completing these chapters. This will help you prepare for similar types of analyses in the units ahead.

4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings

ANSWER TO TRY IT! PROBLEM

A minimum wage (W_min) that is set above the equilibrium wage would create a surplus of unskilled labor equal to (L₂ - L₁). That is, L₂ units of unskilled labor are offered at the minimum wage, but companies only want to use L₁ units at that wage. Because unskilled workers are a substitute for a skilled workers, forcing the price of unskilled workers higher would increase the demand for skilled labor and thus increase their wages.