Microm3 Essay Example | Topics and Well Written Essays - 1000 words

Microm3 - Essay Example 7 4. How Does The ‘Invisible Hand’ Described By Adam Smith Work? Explain What Smith Meant By The Invisible Hand And How It Works. What Signals Producers And Buyers To Adjust Quantity Supplied/Demanded And Reach Equilibrium? 8 5. According To Economic Theory, How Do Consumers Decide What Goods To Buy? What Does The Final Decision To Buy Something Depend On? 10 1. What Happens When The Government Imposes A Minimum Wage? Explain Using A Graph. Minimum wage laws set rules regarding the minimum wage that can be provided by an employer for obtaining labour. The Fair Labour Standards Act of 1938 was established by the US congress to set down the minimum wages that should be offered to employees to ensure a proper standard of living. The labour market faces the forces of demand and supply. The supply of labour is determined by workers and the demand is determined by the employers. In the absence of the government intervention the wages get adjusted with the labour supply and dem and. When the minimum wage is above equilibrium then the supply of labour exceeds the demand. This causes unemployment. Thus, the wages of employees who already have the job increases and the income of employees who do not have the job are lowered. The affect of minimum wage depends on the experience and skills of the employees. The skilled and experienced employees have their equilibrium wages much above the minimum wages. The greatest affect of minimum wages is on the teenage labour based market. Teenagers have low equilibrium wages because they do not have much skills and experience and are willing to work on low pay in exchange for the training they receive on the job. A study reveals that 10% increase in minimum wage reduces teenage employment to 1% - 3%. 10% increase in minimum wage does not increase teenage wages by 10%. The minimum wage also affects the supply quantity of labour. Since the minimum wage of the teenagers increase, the number of teenagers willing to work also i ncreases. Minimum wage increases the income of the poor. Certain opponents of minimum wages consider that it results in unemployment, teenagers dropping out of schools and restricts unskilled workers from obtaining training on their job (Mankiw, 2008). Source: (Encyclopedia of Earth, 2006). The above figure represents the condition in the classical labour market. A legal minimum wage interferes with the free market adjustments and causes true unemployment. The demand and supply model of labour Source: (Encyclopedia of Earth, 2006). The above figure shows conditions in the traditional market. The labour quantity and the equilibrium are determined by market forces. 2. What Economic Concept Explains Why Most People Specialize In A Specific Profession Rather Than Trying To Make All Of The Things Themselves? Specialisation is a concept that relates to most of the modern economies. Modern economies do not produce everything. Rather they produce those things that provide them a ‘comp arative cost advantage’. The excess from the production is exported and the items that are not produced within the country are imported. This kind of specialisation ensures greater economic growth. At an individual level, specialisation ensures greater work efficiency and greater productivity. The high levels of productivity and efficiency ensures high income levels (Jain & Ohri, n.d.). Specialisation is based on the law of comparative advantage. According to the law of comparative advantage, the individual who has a lower opportunity cost of production of a