The knowledge in economics encompasses a wide array of topics that involve different economic activities, such as the ones that influence the government in carrying out regulations on gasoline prices as well as imposing a price floor in relation to the minimum wage. In this discussion, different economic scenarios will be presented along with the possible outcomes of each. In addition to the provided situations about the price ceiling for gasoline and price floor for minimum wages, other economic events will be presented, such as the possible gains and losses of international trade and the possible outcome once the government doubled the tax on gasoline. Although there are different scenarios that will be presented in this discussion, a holistic view shows that every change in economic activity may result to either beneficial or detrimental effects towards the involved stakeholders.
Scenario #1
The first scenario is about the government imposing a price ceiling on gasoline. Some nations are doing this in order to prevent the gasoline prices to get too high. The scenario asks for the possible economic implications of such action against the gasoline market. Evidently, setting a price ceiling on gasoline products would result to lower gas prices. This means that consumers will save money due to saving they can get from purchasing gasoline products. However, this scenarios can also create a simple cause and effect situation. For instance, a product’s lower price means more people will be able to afford it. Relatively, if the gas prices are lower consumer demand may rise. Therefore, a price ceiling creates both positive and negative implications to the economy. It is good that people will have the opportunity to save more money when buying gasoline on a lower price. In fact, business owners who consume considerable amount of gasoline, such as trucking business, cargo forwarders, and other similar businesses, can save a lot of money due to price ceiling. This will provide more profit for the company, thus, reducing the overhead costs that are related to gasoline consumption.
On the other hand, lower gasoline price may not always be an effective approach or at least, a good idea. Saved money from gasoline price may increase other economic expenditures. According to Guenette (2011), setting a price ceiling on gasoline will create a big impact on the gasoline market. This is because, if there is a fixed gasoline price below what is recommended, the supply might not be able to cater the consumer demand. Such demand will increase due to less motivation on the side of the consumers to conserve gasoline. Figure 1 shows how an increased in demand affects the level of supply until it reaches the shortage level.
Figure 1: Gasoline price ceiling increases demand and decreases supply
Price ceiling on gasoline holds both economic advantages and disadvantages. This approach will prevent the suppliers from being engaged to an overcharged prices of their goods and services (Hammond, 2016). Additionally, gasoline price ceiling benefits the people in terms of having a more affordable cost of living during high inflation periods. One of the effects of high inflation rate is the increase in prices of goods and services, such as the gasoline, and setting a price ceiling during these periods will help the people in maintaining their standards of living.
Scenario #2
The second scenario presents an event wherein the government imposes a price floor on minimum wages. This means that there is an ongoing regulation pertaining to the employees’ wages, which should be below what is being imposed by the government. This act will ensure that every employee earns enough for themselves or for their family. However, this approach also creates various economic implications.
Once the government has imposed a minimum wage, all businesses must comply by paying their employees with no less than what was mandated by the government. The labor market is one of the most significant players of the economy. The employees act as the ones who sell the labor or supplier of labor, while the companies are the one that purchase this service. Then again, imposing a minimum wage by the government is another thing. In order to explain this scenario, we use fruits in the supermarket as the laborers and a grocery shopper as the business owners. A grocery shopper has the autonomy which fruit she would like to purchase, but whichever fruit she buys, the minimum price is set to $5 and no other fruits cost $4.99 or less. This goes the same with the labor market that imposes a minimum wage floor. The companies has the autonomy and right to hire whoever they think fits the position, but they cannot offer a salary less than what is mandated by the government.
According to Cooper and John (2011), there are two major economic implications that this approach creates. Primarily, minimum wage floor decreases the number of labor being hired in the market or the unemployment rate will increase. The reason behind this implication is that companies will reduce its capability to pay more employees due to an increased wage. Meaning, the more employees they hire, the higher the salary cost they will shoulder. Therefore, it is ideal that companies would stick to the number of employees they currently have. Otherwise, they will be forced to reduce them in order to reduce cost.
Another economic implication is that there will be more individuals who want to work compared to the ones who are able to find jobs, although the minimum wage mandate has created unemployment (Cooper & John, 2011). For example, 200 people wants to work because of the increased minimum wage. However, the wage floor reduces the amount of jobs available to 100. Therefore, the remaining 100 individuals will not be hired as companies can no longer afford to pay additional 100 employees due to the increased wage. Figure 2 shows a simple graph about how the labor market works.
Figure 2: An increased minimum wage creates more unemployment
Scenario #3
The third scenario is about the international trade. In definition, the international trade is the exchange of goods and services across the international borders. For example, a trade between the United States and China. This type of trade opens new opportunities for the industries to increase their competitiveness against other similar players within the industry. International trade results in cheaper products, which gains the customers themselves. Additionally, this trade also affects the global economy in a way that the law of supply and demand dictates how the good and services are being offered internationally.
International trade is a form of free trade, which means that different countries are free to trade their products across different borders. However, it is often that more economists are in favor of free trade compared to general public (Thoma, 2014). There are various reasons as to why these reactions occur. When it comes to gains and losses, a trading country may benefit from the free trade and at the same time, such approach may create some damages. For example, if the United States continues to have a free trade with China, it will be beneficial for the first as the prices of imported products will be more affordable. Thus, there will be a constant demand for Chinese manufacturers that will sustain their business and labor market. On the other hand, local manufacturers in the United States may suffer as their product will be outsold by imported Chinese products due to its affordability. According to the report, an increased trade with other countries, specifically China, reduces the employment in the manufacturing industry (Thoma, 2014). On the other hand, if tariffs will be imposed, there will be a different effects towards the importing and exporting countries. The importing country will be able to protect its domestic labor market as the imported products may decrease in amount or increase in price. Additionally, the exporting country may impose a price increase on its products due to tariffs of importing country or may reduce the amount of products being exported.
Scenario #4
The last scenario is about an event, to which the government imposes an increase on gasoline tax. With this approach, it will directly affect the revenue collection of the government. However, as the increase in gasoline tax is imposed, the price of the gasoline itself also increases. This creates a chain reaction wherein the production of commodities that depends on gasoline will trigger a price increase. Therefore, higher price means that more consumers are unable to purchase these products, which decreases the overall demand. Figure 3 shows the relationship between the increased gasoline tax and its effects to various factors, such as gasoline and commodity price as well as the effects on the consumer demand.
Figure 3: Effects of increased gasoline tax
If the government doubled the tax on gasoline, the revenue collection will also increase. However, there are underlying effects towards the other economic factors, which might suffer many industries.
Summary
Price ceiling on gasoline increases demand, but may reduce the gasoline supply
Price ceiling on gasoline helps consumers during high inflation rate
Minimum wage floor helps increase the employed individuals, but will increase unemployment
Price floor for wages will trigger cost reduction for companies, i.e., workforce retrenchment
International trade opens opportunity for international competition
Tariffs directly affects the exporting and importing country, specifically the price of their products
Doubled gasoline tax may increase the government revenue collection, but will reduce consumer demand
Increased gasoline tax will increase the commodity price
References
Cooper, R., & John, A. A. (2013). Macroeconomics: Theory through applications. Place of publication not identified: publisher not identified.
Guenette, J. (2011). Gasoline: a price ceiling would not help consumers | IEDM. Retrieved from http://www.iedm.org/35243-gasoline-a-price-ceiling-would-not-help-consumers
Hammond, M. (2016). Advantages & Disadvantages of a Price Ceiling | Chron.com. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-price-ceiling-25210.html
Thoma, M. (2014). Who wins and losses from global trade? - CBS News. Retrieved from http://www.cbsnews.com/news/who-wins-and-loses-from-global-trade/
