Demand and supply are key marketing forces available globally. Chapter 2 of managerial
economics elaborates on the factors that cause a shift and a movement along either the supply
or demand curves. It further explains on the price factor, how changes in this affect the
equilibrium in the market. This explores on the concept of price floor, price ceiling and
deadweight loss, consumer and producer surplus which are initiated by the regulations set by
the government with an attempt of stabilising the economy. Summarily, this chapter aims at
showing decision makers how they can use supply and demand to forecast the activities of the
market to their advantage.
In the case of demand and supply forces, managerial economics highlights various theories that
a manager can apply in their day to day services. Looking at the theories of producer and
consumer surplus managers are able to make decisions specifically in the pricing of products.
Producer surplus looks at the benefits a business receives when it sells a product and consumer
surplus looks at what consumers gain when they pay less than the amount the anticipated they
would pay. In relation to the course we are pursuing, consumer and producer concepts help
managers to understanding how the changes in consumer surplus also affect the producer’s
surplus. If the prices of a product rises, it automatically causes a rise in the producer’s surplus
but affects the willingness of consumers to consume such products hence decreasing the
consumer’s surplus. Knowledge of such will help us as prospective managers to check on how
to manipulate prices but with an overview of the effect on both their profit and the consumer’s
satisfaction basically introducing the concept of price discrimination. For instance, in the cases
were companies promote their products like reducing the price of margarine. The managers
apply the concept of fulfilling the consumers and also building their products by inviting more
people to buy their products at a low price and in large quantities.
A price floor is a legal minimum price allowed by law on a good or service. An effective price
floor is set above the equilibrium. One of the examples of the price floor is the minimum wage.
Over the years the government of Malawi has changed the minimum wage for the labour
market. In line with Malawi employment Act of 2000 section 54 a minimum wage is the lowest
pay that employers are allowed to pay their employees. There are many reasons why the
government imposes minimum wages for instance to increase the income for the least skilled
workers. One of the least skilled workers in Malawi are tea pluckers employed by the tea
association of Malawi. The current minimum wage in Malawi is K50000.
As per diagram 1(see slide5), the government raised the minimum wage from K35000 at which
the demand and supply of labour were equal at 36000 pluckers to K50000. The graph shows
that at the minimum wage of 50000 the farm owners could only afford to employ 22000
pluckers from the 52 000 pluckers who were willing to work. This has led to excess supply of
labour of 30000 pluckers as the farm owners could not afford paying the minimum wage of
50000 to the tea-pluckers.
Effect of minimum wage on the labour market of tea pluckers
Although the government wanted to increase the living standards through increased disposable
income, the graph shows that the minimum wage did the opposite by creating unemployment
(the labour surplus) as farm owners offloaded tea pluckers and were reluctant to employ more
as the minimum wage meant an increase in their costs of operating the tea farms.
This increase reduced the consumer surplus from 300 to 145 as employers have to pay a higher
wage for labour. The producer surplus has increased from 240 to 450 as the tea pluckers are
being offered a market price that is higher than the lowest price of 35000 which they would be
willing to sell.
The minimum wage has also created the deadweight loss which is causing employers to pay
higher wages to employees and preventing low-skilled workers from securing jobs.
Table of values for the tea association of Malawi labour market
Wage/annual(‘000) Demand(‘000)
Supply(‘000)
15
40
22
25
36
26
35
32
32
50
22
60