Find your role and sit at the indicated seat.

1
Find your role and sit at the indicated
seat. Dont disturb the materials.
Shane Seremet
2
The Players and the Goals In this experiment,
there are WORKERS and FIRMS. WORKERS sell labor
to the FIRMS. FIRMS make and sell stuff.
3

• The Players and the Goals
• Two types of worker
• Red workers

One thing makes you happy Money
4

• The Players and the Goals
• One type of firm
• Firms hire Red Labor and Blue Labor to produce
  their products.
• Firms automatically sell everything they
  produce for 2 per unit.

• Each firms goal Maximize profit

Profit Ending Starting
5
The Objects
1 hour of Blue labor
Labor
1 hour of Red labor
Labor
1 dollar

5 dollars (each)
6
Labor Market Red workers and Blue workers sell
as much labor as they can to firms for .
7
Production and Goods Market Hired labor produces
product. Product is automatically sold for 2
each.
Red labor hired
Blue labor hired
Units of output produced
8
Example Labor Market Blue worker 1 Sells 6
to Firm 7 for 5 each. Red worker 2 Sells 8
to Firm 7 for 5 each.
40
30
How much product does Firm 7 produce?
9
Example Labor Market Firm 7 manufactures 87
units of product. The product will be
automatically sold for 2 per unit.
87
10

• Example Labor Market and Goods Market
• Blue Worker 1
• Ends the experiment with (6)(5) 30. Money
  30.
• Red Worker 2
• Ends the experiment with (8)(5) 40. Money
  40.
• Firm 7
• spent 70 on labor, and
• produced and sold 87 output at a price of 2
  each.
• ? Firm 7s profit is 174 70 104.

11
Example Cost/Benefit of Hiring More
Labor Suppose you can hire 1 Red hour for 6 or 1
Blue hour for 7. So far, you have hired 1 Red
hour and 3 Blue hours.
1. How much am I producing right now? 1 Red and
3 Blue ? 43 output 2. What happens if I hire 1
more Red worker? Output increases from 43 to 53
? 10 output 3. What does that do to my
revenue? (10 output)(2) 20
revenue 4. What does it do to my costs? Cost of
1 Red worker 6 ? 6 cost 5. What does it do
to my profit? 20 revenue 6 cost ? 14
profit
12
Example Cost/Benefit of Hiring More
Labor Suppose you can hire 1 Red hour for 6 or 1
Blue hour for 7. So far, you have hired 1 Red
hour and 3 Blue hours.
6. What happens if I hire 1 more Blue
worker? Output increases from 43 to 45 ? 2
output 7. What does that do to my revenue? (2
output)(2) 4 revenue 8. What does it do to
my costs? Cost of 1 Blue worker 7 ? 7
cost 9. What does it do to my profit? 4
revenue 7 cost ? 3 profit
13
Example Cost/Benefit of Hiring More
Labor Suppose you can hire 1 Red hour for 6 or 1
Blue hour for 7. So far, you have hired 1 Red
hour and 3 Blue hours.
Conclusion Hiring 1 more red hour increases
profit by 14. Hiring 1 more blue hour decreases
profit by 3 ? Hire 1 more red hour.
14
The Mechanics
Firms
Workers
Buyer
Manager
15
The Mechanics
Firms
Workers
Manager
Buyer
16
The Mechanics
Firms
Workers
Buyer
Manager
17
Ready to begin
18
Labor Market Red workers sell your labor to
firms for . Blue workers sell your labor to
firms for . Firms Every unit of output you
produce is automatically sold for 2.
19
Report 1. Red workers report unsold labor and
ending money. 2. Blue workers report unsold labor
and ending money. 3. Firms report labor hired and
ending money.
20
New Rules The wage rate that some workers
receive is too low. In the interest of assuring a
minimum standard of living, we now impose a
minimum wage. LAW Henceforth, no firm may pay
less than per hour.
21
Ready to begin
22
Labor Market Red workers sell your labor to
firms for . Blue workers sell your labor to
firms for . Firms Every unit of output you
produce is automatically sold for 2.
FIRMS MUST PAY NO LESS THAN PER HOUR.
23
Report 1. Red workers report unsold labor and
ending money. 2. Blue workers report unsold labor
and ending money. 3. Firms report labor hired and
ending money.
24
Results
25
(No Transcript)
26
(No Transcript)
27
(No Transcript)
28
(No Transcript)
29
(No Transcript)
30
(No Transcript)
31
(No Transcript)
32
Price Controls The intent of price controls is
to provide relief to buyers (e.g., college
tuition caps, interest rate caps) or support to
sellers (e.g., minimum wage, retail milk prices).

• How do you cure a fever?
• Prices are not levers that set value, they are
  metrics that respond to value.
• Price controls fail on two counts
• legislating price does not legislate value,
• legislating price prevents price from signaling
  value.

33
Prices Ration Goods All things are scarce.
Scarce resources will be rationed. The question
is, by what mechanism?

• In a free market, scarce resources are rationed
  by prices.
• With price controls, scarce resources are
  rationed by non-price factors.
• Capping interest rates rations credit away from
  risky borrowers.
• Capping tuition rations college away from less
  advantaged students.
• A minimum wage rations jobs away from less
  productive workers.

34
Minimum Wage When we force an employer to pay a
worker more than the job is worth, the job
disappears.
40 years ago Telephone operators 30 years
ago Gas station attendants 10 years ago Fast
food servers Last year Pizza deliverers

• What happens to workers whose jobs are
  eliminated?
• Those whose labor is worth more than minimum
  wage find new jobs.
• Those whose labor is worth less than minimum
  wage remain unemployed.

35
Source Statistical Abstract of the United
States, and Bureau of Labor Statistics
36
Source Statistical Abstract of the United
States, and Bureau of Labor Statistics
37
Source Statistical Abstract of the United
States, and Bureau of Labor Statistics
38
Source Bureau of Labor Statistics
39
Source Bureau of Labor Statistics
40

• How to Pay for a Minimum Wage
• There are three ways in which a firm can find
  additional money to pay workers.
• Layoff some workers and shift their wages to
  the remaining workers.
• Keep all the workers and pay for the additional
  wages out of profits.
• Keep all the workers and pay for the additional
  wages by raising prices.

41
Source Bureau of Labor Statistics, California
Department of Finance
42
But, we have to do something about the
distribution of income. The rich are getting
richer while the poor get poorer!
43
of Households in Each Income Bracket (2006)
Source Statistical Abstract of the United
States, U.S. Bureau of the Census, 2009, Table
668.
44
of Households in Each Income Bracket (2006)
From 1980 to 1990, the number of households with
purchasing power of at least 75,000 grew while
the number with purchasing power less than
75,000 declined.
Source Statistical Abstract of the United
States, U.S. Bureau of the Census, 2009, Table
668.
45
of Households in Each Income Bracket (2006)
From 1990 to 2006, the number of households with
purchasing power of at least 75,000 grew while
the number with purchasing power less than
75,000 declined.
Source Statistical Abstract of the United
States, U.S. Bureau of the Census, 2009, Table
668.
46
wtf?
47
Source Statistical Abstract of the United
States, U.S. Bureau of the Census, 2008, Table
675.
48
In which world would each person rather live?
In world 1, Person 10 earns 10 of all
income. In world 2, Person 10 earns 15 of all
income.
(prices are the same in the two worlds)
49
(No Transcript)
50
In which world would each person rather live?
World 3s income distribution is the same as
World 1s.
(prices are the same in the two worlds)
51
Conclusions 1. Everything is scarce and will be
rationed. 2. Prices signal information about
value. 3. Price controls both prevent prices from
conveying value information and cause rationing
to be based on some other (usually unanticipated)
factor. 4. Despite no (real) increase in the
minimum wage from 1980 to 2006, the poor got
richer (in real terms).
Because the rich got richer by more than the
poor got richer, the Gini-coefficient shows a
growth in the disparity of income.
52
How Should Society Choose?
To freely choose to purchase is to cast a vote.
How is a free market vote different from a
political vote? Political vote One size fits
all. Free market vote Multiple sizes for
multiple recipients. Political vote Speed of
change is driven by the election cycle. Free
market vote Speed of change is driven by the
accounting cycle. Political vote Signal is
distorted because the vote is for a bundle of
issues embodied by one candidate. Free market
vote Signal is clear because the vote is for a
specific issue.
53
Political freedom makes economic freedom
possible. Economic freedom makes political
freedom meaningful.
54
(No Transcript)
55
(No Transcript)
56
(No Transcript)