Economics – price support, surpluses, shortages:
I want to add a little explanation on economics stuff here. First, almost anytime you’re dealing with economics, draw the little graph, supply line going up, demand line going down.
I can’t draw the graph here, so hopefully I can conceptually explain it:
A government price support requires that a certain price for a good. The most common example is minimum wages, so with minimum wages your “good” is the supply of labor. If the equilibrium wage level is $10, and the government requires a $15 minimum wage –
First draw the little graph, so you have supply of labor and demand for labor, equilibrium is $10, minimum of $15 is above the equilibrium price, so the supply at that price is, say, 100 “units”, but demand at that price is only 50 “units”, hence you have a surplus.
If, alternatively, the equilibrium is $10 and the government sets a minimum wage of $7, then it would have no effect because the consumers of labor (firms / businesses in this example) are willing to pay above that anyway so you find the equilibrium at $10.
Price support is also called a price floor (minimum amount). Ceilings are maximums, like rent controls, which will create a shortage. Let’s stick with wages, theoretically if the government said you can’t pay more than $7, where equilibrium was $10, draw the graph and a line at the $7, you’ll see the quantity supplied at that level is below the quantity demanded, so a shortage.
If you see a supply / demand question come up, draw the graph! Always helps.
.