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The effects of a binding minimum wage

Introduction A binding minimum wage leads to numerous detrimental effects in a competitive labour market. This essay will highlight what these effects are, and what the outcome of these effects will bring to the labour market.
A labour market is defined by Parkin as a market where “employers are on the demand side and workers are on the supply side. Firms decide how much labour to demand, and the lower the wage rate, the greater is the quantity demanded (Parkin, et al., 2008)”. It is said to be competitive when there is a surplus of workers that are seeking a job, with few employer’s willing to hire.
A minimum wage is a price floor implemented by the government, which ensures that an employer must pay a minimum rate of pay to an employee, and anything lower than this rate of pay is illegal. “A minimum wage is binding if it is set above the equilibrium wage (Parkin, et al., 2008)”. “With a binding minimum, wage adjustments are blocked and the market is prevented from allocating labour resources (Parkin, et al., 2008)”.
The Effects 2.1 The Labour Market due to the minimum wage In the labour market, there is said to be an equilibrium wage. This is where the demand and supply lines on the minimum wage graph intersect, as it is the point that the rate of pay is equivalent to that of the quantity of hours worked/required. A binding minimum wage in a competitive labour market means that this equilibrium point is offset as the rate of pay must rises. This can be shown using the following graph (Parkin, et al., 2008).
With relation to part (a) of the Parkin’s graph previously, it is evident that the wage rate of €5 on the Y axis is the equilibrium price, and 21 million hours per week is the equilibrium quantity on the X axis. “The minimum wage is below the equilibrium wage rate and is not binding (Parkin, et al., 2008)”.
Where the rate of pay has increased, and all employees are being paid a higher wage, the hiring company cannot afford to hire as many employees as it will be too expensive, because not only do they have to pay wages for the skilled jobs, they also have to pay a higher wage than they would have intended for workers to perform the lower skilled jobs. Therefore this means that there will be workers on the supply side who will not be able to get a job, thus the unemployment rate will rise. This can be shown in part (b) of the graph (Parkin, et al., 2008).
With relation to part (b), it can be seen that “the minimum wage is €6 an hour, which is above the equilibrium wage. The equilibrium wage is now illegal. At a minimum wage of €6 an hour, 20 million of hours of labour are demanded and 22 million hours are supplied (Parkin, et al., 2008)”. This difference that has been created due to the binding minimum wage creates a surplus of 2 million hours of work per week in the graph, which means that the unemployment rate now rises. This new minimum wage also means that unemployed workers are willing to supply the 20 millionth hour for €4 (Parkin, et al., 2008).
2.2 Inefficiency of the Labour market due to the minimum wage The minimum wage is not efficient, as Parkin states it “results in unemployment – wasted labour resources – and an inefficient amount of job search (Parkin, et al., 2008)”. When looking at a minimum wage graph, a deadweight loss is present. This occurs because of a decrease in both the workers surplus and the company’s surplus. This is seen in the following graph (Parkin, et al., 2008).
Also seen in this inefficiency graph is a potential loss from job search. This loss is said to arise “because someone who finds a job earns €6 an hour but would have been willing to work for €4 (Parkin, et al., 2008)”. This inefficiency affects the labour market as it means there is a deadweight loss of 1 million hours of work per year.
3.0 What might soften my interpretation? The use of a minimum wage brings numerous detrimental effects to people. When looking at the outcomes of a minimum wage, “it delivers an unfair result and imposes unfair rules (Parkin, et al., 2008)”. Parkin also states that this is unfair because only those who can find a job benefit, whereas the unemployed end up worse off than with no minimum wage (Parkin, et al., 2008).

Pricing Concepts The Concept Of Price Economics Essay

It all started with Spice Jet slashing its air fares. In January, 2013, this low frills carrier from India announced that it had slashed its fares on a limited – period sale for 10 lakh seats on all its domestic flights. Spice Jet offered its passengers to fly at Rs. 2013, across India for a travel between February 1 and April 30. The fare being offered by Spice Jet was lower than the train fares too which had recently been hiked, and thus was a huge hit among the customers. The news spread like fire on various social networking sites and through other media. The airline’s official site witnessed mad rush to the extent that some visitors had to wait for their turn to book tickets as the site said “We are experiencing heavy rush. Please wait for your turn”. As expected by the industry experts, other airlines too followed suit. Round-trip fares from Mumbai to Delhi were trimmed from the usual Rs 7,000-9,000 to around Rs 4,000 from February 1 to April 30.
The airlines were expecting low passenger load in the coming months and thus they lured the customers with a price almost 40% lower than the normal prices. The season ended December 2012 had not been great for the airlines and they were expecting the passenger load to decrease in the coming months as well. Since the airline industry is one marred by intense competition, if one airline reduces its fares, the other have to follow the same to survive competition, thus the discounted airfares were available across all carriers on domestic routes. This move by the airlines resulted in huge rush and was also helpful in creating demand during the sluggish season.
Companies today face stiff competition in the market and in order to survive this competition pricing comes as an effective and handy tool. Price has implications on a number of other marketing functions, and thus the pricing decision is of prime concern to the marketer. Attractive pricing not only attracts customers but also helps firms in controlling demand, both during seasons and off seasons accordingly.
The pricing strategy adopted by any firm shall get reflected thereby in the quantity of product sold, the contribution made to profits and the strategic position of the product in the marketplace. Price is the only element of marketing mix that represents revenue for the company, while all other elements of marketing mix signify costs.
The price of any good or service may be defined as its monetary value. But this monetary value is not only the cost of the product but it also encompasses the value that customers exchange for the benefits of having or using the product or service.
Dynamic Pricing is a form of Price Discrimination wherein different customer are charged different prices based on circumstances and situations. Customers are divided into different groups based on customer characteristics or other criteria and different groups are charged different prices.
In 2000, Amazon was caught in a controversy when it was discovered that Amazon was analyzing its customers based on customer’s past purchase history, place of residence and other factors to judge their ability to pay. Based on the given criteria, the company analyzed how much a customer would be willing to pay for a particular product and would then price it accordingly for that particular customer. Thus different sets of customers would buy the same product at different prices. The company received a lot of negative publicity, but they argued that they only charged the customer based on how much the customer valued the product.
Looking back in history, one would notice that different pricing strategies have been employed at various times. Price is nothing but an exchange value, where in a good / service and its associated benefits are being exchanged for some other good / service or some monetary value. This was the beginning of the concept of price – also known as the barter system. Prices were also decided by a negotiation between buyers and sellers. Fixed price policies are a relatively modern concept that was introduced at the end of nineteenth century. With the advent of internet, a new concept of Dynamic Pricing has been introduced. There are a number of e – commerce websites such as ebay, amazon etc. which work on the concept of dynamic pricing.
Price Theory offers the marketers a means to understand the factors that influence price levels. Economists have proposed a model of price determination and the factors affecting price with the help of theory of demand and supply. The other factors that determine price decisions are: costs, elasticity of demand to price, competitor cost and prices, general trend and lifestyle etc.
Definitions Maurice Mandell and Larry Rosenberg defined pricing as the art of translating into quantitative terms the value of the product to customers at a point in time. Pricing cuts across marketing and economics – while marketers set prices, economists explain the interaction of prices with other factors. Different industries make use of diverse pricing policies depending on the level of industry competition.
According to the Dictionary of Marketing by American Marketing Association, “Price is the formal ratio that indicates the quantities of money goods or services needed to acquire a given quantity of goods or services.”
Philip Kotler defined Price as “the amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.”
Kotler has also defined price as one of the most flexible elements of Marketing Mix. Unlike other elements, such as the features of a product or the promotional mix, price can be changed quickly as and when required. Although being flexible, price also carries with itself the power to create or erode brand equity. Marketers may get caught in the trap by reducing prices too frequently and thus eroding equity.
Pricing Considerations There are various factors that make an impact on the pricing decisions of a firm. These factors act as a consideration as to what pricing strategy and pricing method the company shall choose. These factors are:
Marketing Objectives: A company may decide to aim at one of the following objectives – survival, profit maximization, market share leadership or product quality leadership. Depending on the objective chosen, the company shall identify a suitable pricing method which shall help it in achieving its desired objectives. For instance, a company that adopts profit maximization as its marketing objective determines its demand and costs for the product and then selects a price that produces maximum current profit.
Marketing Mix Strategy: Price forms one of the 4P’s of Marketing Mix, the others being Product, Place