Activities

1.

In our last lesson we saw that our most advantageous response to high demand for our product was simply to raise our price to the market-clearing level. But did you suspect that such a high rate of profit was too good to last? Pretty soon, other hot dog stands started opening up, undercutting our prices, and changing our parking lot from a goldmine to a sweatshop. Write a paragraph on what steps you would take in response to this situation. Then, get together with the same group with which you worked before on expanding the hot dog business, and compare strategies. Each group can then present what they have come up with to the rest of the class.

After reading the excerpt, please answer the following questions.

  1. How do increases in supply affect prices?
  2. How do decreases in supply affect prices?
  3. What prevents a producer from creating an unlimited supply of a product?
  4. What products or resources lend themselves to an absolute monopoly?
  5. What is the role of price in determining supply and demand?

2. Henry George on Wages

Henry George analyzed the labor market in his 1879 book Progress and Poverty:
The fundamental principle of human action -- the law that is to Political Economy what the law of gravitation is to physics -- is that men seek to gratify their desires with the least exertion. Evidently this principle must bring to an equality, through the competition it induces, the reward gained by equal exertions under similar circumstances....

Under this principle, what, in conditions of freedom, will be the terms on which one man can hire others to work for him? Evidently, they will be fixed by what those others could make if labouring for themselves. The principle which will prevent him from having to give anything above that, except what is necessary to induce the change, will also prevent them from taking less. Did they demand more, the competition of others would prevent them from getting employment. Did he offer less, none would accept the terms, as they could obtain greater results by working for themselves. Thus although the employer wishes to pay as little as possible, and the employee to receive as much as possible, wages will be fixed by the value of such labour to the labourers themselves. If wages are temporarily carried either above or below this line, a tendency to carry them back at once arises.

Please answer the following questions.

  1. What does George mean by "exertion"? How is it different from exerting yourself, getting sweaty playing basketball?
  2. If people can employ themselves, why would they choose to work for someone else?
  3. If workers cannot find self-employment, what can they damand in wages from their employers?
  4. If there were many unemployed workers, what effect would that have on wage levels?
  5. In World War II, a great many men were employed by the armed forces. This created a shortage of labor, and many women went to work in factories across the United States. What effect do you think this had on wages?

3. Analyzing a Chart on the Minimum Wage

Please study the following chart, fill in the right-hand column, and then answer the questions below:

DateMinimum WageInflation ratePercent change
(nominal)		Percent change
(real)
Jan 1, 1978$2.65----.
Jan 1, 1979$2.909.3%9.4%0.1%
Jan 1, 1980$3.1013.9%10.3%-1.5%
Jan 1, 1981$3.3511.8%8.1%-3.2%
Jan 1, 1990$3.8046.4%13.4%-22.4%
Jan 1, 1991$4.255.7%11.8%5.7%
Oct 1, 1996$4.7517.6%11.8%-4.8%
Sep 1, 1997$5.151.8%8.4%6.4%
1978 - 1997$5.15157.9%94.3%-24.6%

  1. What is the difference between the nominal rate and the real rate of change in wage levels?
  2. Why did real wages decline in 1980 and 1981, even though rates were increased each year by fairly large amounts?
  3. Why did the buying power of the minimum wage drop so much between 1981 and 1990?
  4. If the minimum wage level is raised, what can you expect to happen to wages at higher levels?
  5. If the minimum wage level is raised, what effect would it have on unemployment? Explain your answer.
  6. Does the imposition of a national minimum wage inhibit free competition in the economy? Explain

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