effects of increased NMW (1)

Question 1

microeconomic effects of an increased NMW on producers + consumers

Answer 1

REDUCED PROFITS
- UK raised NMW from 8.60->10 (18-20 y/os) -> higher variable costs (diagram) -> if AR>AVC: can continue to operate -> reduced SNP -> less funds for capital investment -> less likely to invest in R&D -> less dynamic efficiency -> reduced quality improvements -> less able to exploit technical economies of scale -> increased LRAC -> smaller firms may struggle (AR>AC = shut down)
LESS CONSUMER CHOICE
- firms may be forced to exit the market -> less market competition -> less choice -> firms have greater price-setting ability and may raise prices to maintain profit margins -> less consumer surplus -> harms consumer welfare

Question 2

evaluate increased NMW on producers + consumers

Answer 2

PROFITS MAY NOT FALL
- depends on the size of the firm e.g. coffee shop market = oligpoly and may benefit from internal EoS e.g. purchasing -> lower LRAC -> increased profits + can pass on lower costs to consumers = incr consumer surplus + improved welfare (PRICES MAY NOT RISE)

Question 3

microeconomic effects of increased NMW on workers

Answer 3

MAY REDUCE MONOPSONY POWER + INCREASE WAGES
- e.g. in the NHS -> firms have bargaining power + can set wages -> doctors are paid lower as there is a lack of alternative employers -> NMW acts as a price floor -> brings wages closer to MRP of labour -> attracts more workers + increases labour supply -> reduces labour shortages -> corrects labour market failure -> more incentive to work + improved worker morale -> may improve productivity + boost dynamic efficiency
- WELD = inelastic therefore employers are less likely to automate tasks (e.g. high proportion of total costs, long training times + few close substitutes for labour)

Question 4

evalaute the microeconomic effect of increased NMW on workers

Answer 4

MONOSPONY POWER MAY NOT REDUCE + MARKET FAILURE NOT CORRECTED
- for low-skilled jobs within the NHS e.g. hospital receptionists + cleaners -> risk of increased unemployment due to increased cost pressures -> Qd for labour contracts -> easier to substitute labour for capital + automate tasks to cut costs -> may lead to increased occupaitonal immonility of labour -> incr discouraged workers -> waste of scarce resources -> gov. failure