Quiz 3: Government Control of Prices in Mixed Systems: What Are the Actual Outcomes


In order to maintain stability, prices have to be regulated. This prevents inflation from becoming rampant and safeguards the incomes of those who sell the products. These regulations are known as price floors and price ceilings. Price floors are a minimum value or price that must be placed on a good or service. This allows the associates responsible for selling good or service to have higher income for their work. Probably one of the most current examples is minimum-wage legislation. This is the lowest per hour price that workers can be paid; it has increased over the years to allow new workers to more adequately cope with the rising cost of living. Price ceilings are a maximum price that be placed on good or service. This helps stem inflation and keeps business from charging exorbitant amounts to customers. Rent controls placed on apartments and housing associations are an example of price ceilings. They keep housing areas from becoming economically exclusive.

When a firm or business hires a new worker or invests in a new unit of production, that business's production output will experience an increase that is then converted into increased revenue for the business (assuming the worker/production unit performs at satisfactory levels). This increased revenue is referred to as the marginal revenue product of labor. Employers use this to place a certain amount of value on their workers and units. The marginal revenue of labor has two components: the increase in production due to acquiring the new labor unit or marginal product of labor ; and the increase in revenue resulting from selling of additional products due to the activities of the new labor unit, which is known as the marginal revenue. Due to the law of diminishing returns , which states that revenue will decrease as more labor components are added to a firm, businesses and firms often rely on the relative value of their employees or labor units when deciding when to hire more workers and how to downsize. The workers or units whose production leads to higher revenues are more highly valued and will be kept while those who are stagnant or decreasing in their production are let go or valued less. For this reason, the marginal revenue product of labor is said to be reflective of a firm's demand for labor.

For most businesses, the interaction between the owners, their workers, and any resulting revenue is separated by several levels and chains of commands. The owners do not directly benefit or suffer from the production that occurs within their firm. Rather, these effects are felt further down the line in the form of gains or losses in revenue that accrue over a period of time. This tends to be dependent on how popular or in demand certain products and services are among other factors. Because of this fact, the demand for labor is stated to be a derived demand. This means that the labor demand of a firm depends on the demand of the product being made.