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Good question. I don't know. Ireland?

What is the accepted economic wisdom on the success of Ireland? In addition to tax cutting, I thought it had a lot to do with The World is Flat economy, starting with data entry centres for US based companies (as opposed to weakening unions).

I know they had some sort of deal with the unions to exercise wage restraint, or something. But yes, Ireland's success until recently could have had a number of causes. I think conventional wisdom cites multiple causes.

"When *all* firms increase output and/or raise prices together, this can and will cause an *upward shift* of each individual firm's MC curve."
First, I think you have propensity to confuse costs and prices. They are not firmly linked within the firm, though of course, spending and income are the same in the macro.
Secondly, an increase to output on an existing MC curve does not necessitate a shift to the curve, but a shift along the curve. An increase to output does not mean an increase to prices on a down sloping curve. Now, if all firms were to increase prices, then yes, the mc would shift, but if all firms simply increased output, the mc would not shift.

"What they forget is that an AD curve by itself cannot determine the level of output and employment. You need a second curve in {P,Y} space, to tell you whether an increase in AD (a rightward shift in the AD curve) will cause Y to increase or P to increase. "

"What they forget is that an AD curve by itself cannot determine the level of output and employment. You need a second curve in {P,Y} space, to tell you whether an increase in AD (a rightward shift in the AD curve) will cause Y to increase or P to increase. ... And in the long run, unless prices are permanently sticky, or people suffer from permanent money-illusion, that second curve will be vertical. So an increase in AD only affects prices in the long run. And if an increase in minimum wages shifts that second curve to the left (which it generally will), it causes output and employment to fall, regardless of Aggregate Demand. "
No, it is not the second curve which is vertical, but the AD. What is spent is determined by income. People spend their money, and how much money they will spend in aggregate is not at all determined by the prices at the store. The second curve must be based on the mc slope, and the mc slope of all firms is down.

"(This was a very costly lesson that economists learned in the 1970's)."
What happened in the 70s was an oversupply of money leading to a devaluation on money. This alone was not detrimental to the economy, but this devaluation caused an erosion to the real effect of the minimum wage, and by cutting the minimum wage, the foundation of all prices was eroded, and stagnation started to set in.

"For a monopolistically competitive firm in equilibrium, *locally* the ATC curve must slope down (though it may slope up further out). The MC curve could slope up, down, or just go sideways. Sideways is not a bad assumption, until you really start to hit capacity constraints, but for most firms that usually happens only in a boom, would be my guess. "
But for any validity of conventional economics, the slope must be up. Therefore you assume the slope is up regardless the evidence to the contrary.

"But that possibility could always be fixed by an appropriate monetary policy in any case. "
Monetary policy affects M only, and can have no effect on V. As I said before, the best V is done by the lower class worker who spends his money as soon as he gets it. Other entities can dither for months before deciding where the money should be spent.
"If we assume nominal wages are fixed, we normally get an upward-sloping AS curve, in {P.Y} space."
No! The AS is derived from the MC. The AS is down sloped.

"Ireland? But then we so rarely get clean natural experiments. "
Ireland was poverty stricken for ever until it got the minimum wage in the 1990s. They were of course getting some growth through the 90s, before the national mw came in in (2000 republic and 1999 northern) but I think this due to regional MW which almost always precedes a national regulation. The economic miracle is quite in keeping with my world view."When *all* firms increase output and/or raise prices together, this can and will cause an *upward shift* of each individual firm's MC curve."
First, I think you have propensity to confuse costs and prices. They are not firmly linked within the firm, though of course, spending and income are the same in the macro.
Secondly, an increase to output on an existing MC curve does not necessitate a shift to the curve, but a shift along the curve. An increase to output does not mean an increase to prices on a down sloping curve. Now, if all firms were to increase prices, then yes, the mc would shift, but if all firms simply increased output, the mc would not shift.

"What they forget is that an AD curve by itself cannot determine the level of output and employment. You need a second curve in {P,Y} space, to tell you whether an increase in AD (a rightward shift in the AD curve) will cause Y to increase or P to increase. "

"What they forget is that an AD curve by itself cannot determine the level of output and employment. You need a second curve in {P,Y} space, to tell you whether an increase in AD (a rightward shift in the AD curve) will cause Y to increase or P to increase. ... And in the long run, unless prices are permanently sticky, or people suffer from permanent money-illusion, that second curve will be vertical. So an increase in AD only affects prices in the long run. And if an increase in minimum wages shifts that second curve to the left (which it generally will), it causes output and employment to fall, regardless of Aggregate Demand. "
No, it is not the second curve which is vertical, but the AD. What is spent is determined by income. People spend their money, and how much money they will spend in aggregate is not at all determined by the prices at the store. The second curve must be based on the mc slope, and the mc slope of all firms is down.

"(This was a very costly lesson that economists learned in the 1970's)."
What happened in the 70s was an oversupply of money leading to a devaluation on money. This alone was not detrimental to the economy, but this devaluation caused an erosion to the real effect of the minimum wage, and by cutting the minimum wage, the foundation of all prices was eroded, and stagnation started to set in.

"For a monopolistically competitive firm in equilibrium, *locally* the ATC curve must slope down (though it may slope up further out). The MC curve could slope up, down, or just go sideways. Sideways is not a bad assumption, until you really start to hit capacity constraints, but for most firms that usually happens only in a boom, would be my guess. "
But for any validity of conventional economics, the slope must be up. Therefore you assume the slope is up regardless the evidence to the contrary.

"But that possibility could always be fixed by an appropriate monetary policy in any case. "
Monetary policy affects M only, and can have no effect on V. As I said before, the best V is done by the lower class worker who spends his money as soon as he gets it. Other entities can dither for months before deciding where the money should be spent.
"If we assume nominal wages are fixed, we normally get an upward-sloping AS curve, in {P.Y} space."
No! The AS is derived from the MC. The AS is down sloped.

"Ireland? But then we so rarely get clean natural experiments. "
Ireland was poverty stricken for ever until it got the minimum wage in the 1990s. They were of course getting some growth through the 90s, before the national mw came in in (2000 republic and 1999 northern) but I think this due to regional MW which almost always precedes a national regulation. The economic miracle is quite in keeping with my world view.

aaaaugh
Gee I wish one could edit a post. Sorry guys.

No Allan, The republic of Ireland did not get any sort of minimum wage until 2000. The economic miracle you speak of does not exist. You are being disillusioned since you do not present evidence of this. Going from wikipedia, minimum wage did not exist in ireland until 2000. 5 years prior to that, Ireland experienced what is called the "celtic tiger." Between 1995 until 2008, they experienced MASSIVE growth. Ireland's main problem before all that was emigration. Too many people were leaving the country in order to do better.

Quoted from Wiki:

The causes of Ireland's growth are the subject of some debate, but credit has been primarily given to state-driven economic development: social partnership between employers, government and unions, increased participation in the labour force of women, decades of investment in domestic higher education; targeting of foreign direct investment; a low corporation tax rate; an English-speaking workforce, and crucial EU membership – which provided transfer payments and export access to the Single Market.

Also Allan, according to this website, minimum wage in Ireland isn't even that comprehensive, nor does it apply to everyone.

http://www.citizensinformation.ie/categories/employment/employment-rights-and-conditions/pay-and-employment/pay_inc_min_wage

Here is what minimum wage doesn't apply to:

* Overtime premium
* Call-out premium
* Service pay
* Unsocial hours premium
* Tips which are placed in a central fund managed by the employer and paid as part of your wages
* Premiums for working public holidays, Saturdays or Sundays
* Allowances for special or additional duties
* On-call or standby allowances
* Certain payments in relation to absences from work, for example, sick pay, holiday pay or pay during health and safety leave
* Payment connected with leaving the employment including retirement
* Contributions paid by the employer into any occupational pension scheme available to you
* Redundancy payments
* An advance payment of, for example, salary: the amount involved will be taken into account for the period in which it would normally have been paid
* Payment in kind or benefit in kind, other than board and/or lodgings
* Payment not connected with the person's employment
* Compensation for injury or loss of tools
* Award as part of a staff suggestion scheme
* Loan by the employer to you

So all of your ideas that minimum wage gave prosperity to ireland is simply not true, because of the evidence presented against you. You can claim that it keeps your world view if you can show us proof.

You seem to be listing benefits that are over and above minimum wage. These things help the individual income (consumer spending) but none of these can constitute the foundation which is the minimum wage.
That there was no national minimum wage is not evidence of an absence of regional minimum wage. I state that the modern economy requires the foundation of the minimum wage. Ireland is evidence of this. You state that minimum wage is detrimental to the modern economy. Ireland is evidence against this.

"You seem to be listing benefits that are over and above minimum wage. These things help the individual income (consumer spending) but none of these can constitute the foundation which is the minimum wage.
That there was no national minimum wage is not evidence of an absence of regional minimum wage. I state that the modern economy requires the foundation of the minimum wage. Ireland is evidence of this. You state that minimum wage is detrimental to the modern economy. Ireland is evidence against this."

No, because there was NO regional minimum wage in Ireland. The united states is a very unique place compared to the rest of the world. The US has 50 seperate independent governments that unite under one federal government. The rest of the world is not like that. Most of the world is united under one government. And there is no "regional minimum wage" for Ireland because there are no regions in ireland that have their own unique government. Minimum wage did not exist in ireland until 2000. Between 1995-2000, ireland experienced growth WITHOUT A MINIMUM WAGE

Look Allan, show me proof that minimum wage existed in ireland in the 1990's. I have searched all around google and have come up with nothing. There has been no proof that minimum wage did exist in the 1990's. The first minimum wage in ireland was 2000. Before that, no minimum wage existed. Also, collective bargaining argeements is NOT the same as minimum wage.

Secondly, minimum wage is not uniform in Ireland. It changes depending upon whether it is your first year of work or even second year of work. 30% of the minimum wage is cut if you are under 18. 20% is cut if you are in your first year of work. 10% of the minimum wage is cut if it is your second year.

In conclusion, once again, minimum wage did not exist in ireland until 2000. Before that, there was no minimum wage. Yet, they experienced growth starting in 1995, called the celtic tiger. Unemployment dropped(and as you said, unemployment can ONLY drop when minimum wage is increased), as well as people wages were rising, despite the fact no minimum wage existing in ireland. If it was true there was in the regions, we should have seen only certain regions succeeding while others failing. But this "celtic tiger" was all across ireland.

If minimum wage was regional, you can also show the regions that were failing, and the ones that were succeeding.

Allan: I think some stuff in your comment got repeated, but it's still readable.

What I'm trying to do here is to make sense of your implicit model.

1. Slope of the individual firm's MC curve?

An individual firm's having a downward-sloping MC curve is inconsistent with perfect competition, yes. But it's not inconsistent with imperfect competition. And I'm assuming imperfect competition. (Because I'm trying to make your implicit model make sense). Firms maximise profits where MC=MR. And the MR curve must cut MC from above, otherwise it's profit *minimisation*, not maximisation, and no firm would minimise profits. A perfectly competitive firm faces a horizontal demand and MR curve, so clearly cannot have a downward-sloping MC curve. But an imperfectly competitive firm, which faces a downward-sloping demand curve *may* (and usually will) have a downward-sloping MR curve. Providing the MR curve is steeper than the MC curve, so cuts it from above, this is consistent with profit-maximisation. Let's assume this is the case (otherwise your model doesn't make sense).

2. Does other firms' behaviour cause the individual firm's MC curve to shift?

I can think of 2 (or 3) reasons why it might:
i) If other firms increase output and employment and this bids up the wages that our firm must pay to attract labour, this will cause our firm's MC curve to shift up.
ii) If other firms raise prices, and workers care about real not money wages, and so this raises the money wages that our firm must pay its workers, this will cause our firm's MC curve to shift up.
iii) (If our firm buys inputs from other firms, and if other firms raise the price of those inputs, this will cause our firm's MC curve to shift up. But maybe we should ignore this one for simplicity.)

If you don't like any of these shifts of the MC curve, my guess is that you are assuming fixed money wages? I.e. you are assuming that money wages are affected by neither inflation nor unemployment (at least until we get to some very low level of unemployment, which we can call "full employment"). Correct?

3) Slope of the AS curve.

SRAS. If you assume fixed money wages, then the SRAS curve will not be vertical. That's standard. If you assume that an individual firm has a downward-sloping MC curve, and nothing that other firms do shifts that MC curve, then you get a downward-sloping SRAS curve. That's non-standard, but it follows from the assumptions that I have made above (on your behalf?).

Now for the LRAS. Start at a point on the SRAS that is an equilibrium. This doesn't mean "full-employment" (whatever that means); it does mean that each firm has output where MR=MC and so is maximising profits. Suppose all prices double, and all firms hold output and employment constant (hypothetically). What happens to the SRAS at that point? If workers, unions, or the government, or whoever sets the wage, suffers from money-illusion, and only cares about the money wage, then nothing happens to the SRAS. But if whoever sets the wage does *not* suffer from money-illusion, and thinks in terms of a *real* wage, they will double the money wage, so the SRAS will double in height vertically. That defines a vertical LRAS curve.

That's the standard model (except for the fact that your SRAS slopes downward instead of upward). A vertical LRAS and a non-vertical SRAS. Money wages fixed in the Short Run, and fully indexed for inflation in the Long Run.

If you assume that the AS curve is downward-sloping in both the short and long run, I can only suppose you are assuming long-run money illusion.

Leaving aside the question of whether money wages adjust in response to changes in the price level, there is also the question of whether money wages adjust in response to changes in unemployment. I normally assume that if output and employment rises, so unemployment falls, that increases workers' bargaining power, so money wages will tend to rise. If my assumption is right, then if we start at an equilibrium point on the SRAS curve, and move long it to higher output and lower unemployment, money wages would rise, and keep on rising. So the SRAS curve would be shifting up as we move along it. So it can't be a LRAS curve. I think you must be assuming that changes in unemployment have no effect on money wages too.

4. Slope of AD curve.

Assume closed economy for simplicity.

Yes, people get their income from selling the goods and services they produce. So their income is just equal to the value of the goods and services they produce and sell. If people always and everywhere (in aggregate) spend all their income, regardless of anything else (like the price level, stock of money, interest rates, whatever), then we get Say's Law. Supply creates its own demand. A fall in the price level will not affect AD. So the AD curve is vertical. But by the same token, an increase in output at the same price level will generate an exactly proportionate increase in the demand for output. So the AD curve is also horizontal. In fact, given that assumption, the AD curve is both vertical and horizontal. It's a very *thick* curve. So thick, it covers all the space. All points in {P,Y} space are on the AD "curve".

Nope.

MV=PY generates a nice downward-sloping rectangular hyperbola AD curve, if we assume M and V are fixed. Because PxY is then a constant, which is the definition of a rectangular hyperbola. You can have other-shaped AD curves if you like. Actually, since the Bank of Canada can adjust M to changes in P and V however it likes, the shape of the AD curve is whatever the Bank of Canada wants it to be.

I had better take a break. I will try to edit your comment, to remove the duplications Allan.

Just realised I can't edit your comment, because it's Stephen's post. Never mind.

I would actually argue that increasing the minimum wage would hurt the poor more on average, by raising prices.

@Allen Manchester:

Actually Switzerland doesn't have a minimum wage either.

@Doc Merlin

Allan would argue that collective bargaining agreements = minimum wage. Denmark doesn't technically have a minimum wage either. But they do operate on a collective bargaining agreement. So he equates them to being the same effect. It's just minimum wage with max bureaucracy. I find it to be totally different, but try convincing him of that.

Doc: If all prices rise by the same proportion as the nominal minimum wage increases, (as they would if the Bank of Canada adjusted the money supply in the same proportion, to keep unemployment the same), then there are no real effects, of course. If the Bank doesn't adjust the money supply (or adjusts it less than proportionately), then real AD will fall, unemployment will rise, and prices will rise by less than the minimum wage, so the real minimum wage will rise.

Those that will be hurt will be: the unemployed (obviously); those who consume a lot of goods produced by minimum wage workers, but who don't themselves earn the minimum wage.

By the way:

Assume all workers are paid the minimum wage.

Assume the minimum wage is perfectly indexed to the price level, so it's a real minimum wage.

Assume the elasticity of a firm's demand, and so the markup of prices over marginal costs, is a constant.

Assume that the marginal product of labour is increasing in employment.

(This is a variant on what I think is Allan's implicit model, in which the exogenous wage is fully indexed to the price level.)

Then the macroeconomic equilibrium is unstable.

The aggregate labour demand curve is upward-sloping in {real wage,employment} space, because W/P=(1-1/e)MPL, where e is elasticity.

The aggregate "supply" curve of labour, in the same space, is horizontal, since the real wage is assumed fixed by law.

You get 3 vertical LRAS curves. The middle one defines an unstable equilibrium with unemployment. The right hand one is at full employment, with workers paid above the minimum wage (or an excess demand for labour, if we assume the minimum wage is also a maximum wage). The left had one is where the economy collapses to 100% unemployment.

Since we almost never observe an economy in an unstable equilibrium, we would either see 0% or 100% unemployment.

Just thought I would throw that one out there.

Minimum Wage is not the issue, distribution of profits is. Intelligent and well run organizations.... take sports leagues with unions for instance: The minimum wage is set by league profits and a specified percentage go to wage increases.

Legislating or demanding dollar amounts is silly, but prescribing wage increases based on profit increases is not. For instance Wal-mart could stand to raise wages at the expense of dividends paid, but small businesses would suffer if they were forced to follow suit.

The aggregate effect of a broad mandated increase is bad unless it is based on a formula that exempts small business and makes the wage increases variable....

Just to clarify before I comment... by MR I assume that you mean marginal return, or average profit per unit sold? Sorry, but its been years since I delved into this.

MR is Marginal Revenue. Formally, it's the change in Total Revenue (Price x Quantity) if the firm sells one more unit of output. For a perfectly competitive firm, which faces a horizontal demand curve, MR is the same as Price. For an imperfectly competitive firm, which faces a downward-sloping demand curve, MR is less than Price. The intuition is that if the firm wants to sell one more unit of output, it must reduce its price (sliding down along the demand curve), so the MR equals the new price on the extra unit, minus the lost revenue from having to cut price on all existing sales.

A profit-maximising firm will choose that price and level of output where MR=MC.

By the way, kudos to you for arguing this through. Also for thinking for yourself, and not just accepting everything the textbook says. You obviously learned some economics a long time in the past, but rejected it because it didn't seem to match the way you saw the world. Maybe, just maybe, I can convince you that there's more to economics than what you were taught in the past.

Allan:

♫ Let your fingers do the walking through the yellow pages the Google search page. Get the facts. The yellow pages The Google searches way! ♫

Okay so if we raised the minimum wage to $40/hr, I guess it would have no negative result?

The intuition is that if the firm wants to sell one more unit of output, it must reduce its price (sliding down along the demand curve)
You put price as much too important to the firm's marketing strategy. Price is a very small part of the strategy, and most times, money spent on marketing (whether in reduced prices or other campaigns) will reap rewards in sales far in excess to any costs involved, and continue reaping rewards far into the future. You try hard not to spend on marketing an excess to the return you will receive on it. Because marketing rewards tend to accumulate, a firm's sales tend to rise over time. It is quite short sighted to think that the sales volume moves strictly in reaction to price. Many times, it is impossible to really understand why the sales go up, they just do, thank God.
Further, with the down slope of the MC, the MR is up sloped and from break even point, there is an open ended gap between the MC and the MR. It is the firm's sincere intention to maximize sales with the resources that it has, but the sales volume seems quite unresponsive to price changes, and so marketing departments concentrate on ways to make the sale without changing the price, or at least without changing the MR.

>Okay so if we raised the minimum wage to $40/hr, I guess it would have no negative result?<
My intuition says that maximum benefits would be about 1/4 to 1/2 average earnings, about $13 to 25/hr. Somewhere above that, as you approached the average, you would start to constrict the economy by disallowing excess earnings, because if the minimum is equal to the average, then the maximum too must equal the average. What would be the negative effects could only be speculative, and I don't wish to speculate, but the problems do not accrue from the existence of the price floor where ever, but by the mathematically induced price ceiling which could severely impair some people's earning potential.

For what it's worth: H&R Block has increased the wages of its part-time, entry-level employees in Ontario from $10.50 to $11.00 per hour starting April 1st, the date the Ontario minimum wage went from $9.50 to $10.25.

This is an anecdote (though a significant one; H&R Block employs thousands of part-time workers), but it pokes a hole in the original argument. A raise in the minimum wage can apparently lift other wages too.

Allan:

"Further, with the down slope of the MC, the MR is up sloped and from break even point, there is an open ended gap between the MC and the MR. It is the firm's sincere intention to maximize sales with the resources that it has, but the sales volume seems quite unresponsive to price changes, and so marketing departments concentrate on ways to make the sale without changing the price, or at least without changing the MR."

Hold quality, marketing effort, etc., constant for the minute. If a 1% cuts in P (price) causes a 1% increase in Qd (quantity demanded), then MR is zero. A firm with positive MC would never produce at a point where a 1% cut in P caused a less than 1% increase in Qd. It would increase profits by increasing P, because this would raise Total Revenue, and cut total Costs at the same time.

Simplest example: suppose there is some price so high that Qd is zero, then as it cuts P, and eventually Qd rises above 0. So a 1% cut in P increases Qd by more than 1%. Then as it cuts P more and more, a 1% cut in P causes Qd to rise by a smaller and smaller percentage.

In that example, the MR curve slopes down.

Again, if the MR slopes up, and MC slopes down, the firm is not maximising profits. It will cut P until it does get to a point where MR cuts MC from above.

Now, it is true that economists normally draw a 2-Dimensional demand curve and cost curve. Price and quantity, holding everything else, like quality and marketing effort, constant. 2D is all our chalkboards and paper (and brains) can handle. But there's no reason in principle why we can't handle 3D or 4D or nD. The math can take it. Suppose we have a 3D demand and cost function (price, quantity, quality). We can define MR and MC curves as quantity adjusts holding quality constant. But we can also define MR and MC curves letting quality adjust holding quantity constant.

If we increased quality by "one unit", holding quantity constant, how much would that let us raise P and Total Revenue, and how much would it increase Total Costs? The first is MR with respect to quality, the second is MC with respect to quality. And that new MR curve must cut the new MC curve from above, to get the profit-maximising amount of quality.

So the MR curve must cut the MC curve from above, both in the quantity dimension and in the quality dimension.

Adding the extra dimension(s) like quality of marketing effort just complicates the story. I can't see how it changes anything fundamental.
It's really just the same, once you get your head around the extra dimension.

"For what it's worth: H&R Block has increased the wages of its part-time, entry-level employees in Ontario from $10.50 to $11.00 per hour starting April 1st, the date the Ontario minimum wage went from $9.50 to $10.25.

This is an anecdote (though a significant one; H&R Block employs thousands of part-time workers), but it pokes a hole in the original argument. A raise in the minimum wage can apparently lift other wages too."

This gives me the idea then, if following Allan's logic, that the minimum wage can never reach the average. If you constantly increase the minimum wage, other wages will follow suit. Therefore, using Allan's logic, the minimum wage increases increase the average. So mathematically, the minimum can NEVER equal the average, or even approach it.

>Simplest example: suppose there is some price so high that Qd is zero, then as it cuts P, and eventually Qd rises above 0. So a 1% cut in P increases Qd by more than 1%. Then as it cuts P more and more, a 1% cut in P causes Qd to rise by a smaller and smaller percentage.<
Prices are chosen by what competitors are doing and not at all by how much each unit costs. Most managers are quite ignorant of cost accounting. When Tim Hortons has viable competition in the new area, their coffee is 5 cents cheaper. After the competition is closed down, the prices go up 5 cents. Now the MC on coffee is about 20 cents a cup including normal condiments, no where near the selling price. In fact I've said that if prices were based on cost, coffee would be free, and charges would be on the cream and sugar.
Start up firms do not have any MR. They need time to build up sales, and they need sales to pay for their startup marketing. Firms start off with a negative MR and once they have broken even, they raise prices until they feel that a 1% hike on the price will give them more than a 1% backlash on sales. This is how the real world works. They do not maximize profit by cutting prices. Cutting prices is usually an effort to cut losses.

This is how the real world works. They do not maximize profit by cutting prices. Cutting prices is usually an effort to cut losses.

Not true. Product life cycle. Take a new product - say iPhone. Usually hyped and introduced at a high price for early adopters, tech nerds. Then over time, as word of mouth travels, product gets earned reviews in media etc. - it starts dropping price and increasing volumes through wider dist'n channels. Then as product matures (competition catches up, prices drop - becomes commodity) - introduce new product - say iPad. Rinse. Repeat.

> Usually hyped and introduced at a high price for early adopters, tech nerds.<
By the end of the production, mc is getting close to zero. Yes as the mc goes down, it gives a pull on the price. This is not to say that the mr is going down.

Thing is, if they cut the price by 75%, could they make some more money off the thing? Probably, but not as much as they hope to make off the next generation, and so rather than maximizing the profits by continuing to cut prices, they scrap the profitable production and gear up for the next thing which won't see any profit for at least six months.

In fact, production is probably ceased as soon as mr *starts* to swing down

>A raise in the minimum wage can apparently lift other wages too.<
Of course it does. MW is the foundation for all prices. When prices go too low, money circulation is impeded and stagnation sets in. The only way to get as vibrant an economy as possible is to set the foundation price high enough to ensure a good distribution, and to pin that price to the GDP so that as the economy grows, no price gets left behind.

In fact, production is probably ceased as soon as mr *starts* to swing down

How do you explain loss leaders?

Marketing costs. If the returns on sales is less than the costs of the marketing, you need new strategy. You don't maximize your profit by cutting prices. You maximize your sales by cutting *some* prices *some* times.

Thing is, if they cut the price by 75%, could they make some more money off the thing? Probably, but not as much as they hope to make off the next generation, and so rather than maximizing the profits by continuing to cut prices, they scrap the profitable production and gear up for the next thing which won't see any profit for at least six months.

Actually, that is not true. I believe Apple is making more money off of the iphone than the Ipad, which is a lot newer. And they have not ceased production on things like the ipod nano, the shuffle, and some of their products that I would consider "cash cows." Cash cows in the business world if you did not know are established products that don't change very much over time. This would include apple products like their laptops and desktops. They still make them money, but they aren't doing big innovations with them. Sure, they upgrade them every month or so in accordance to the rise in technology, but they aren't concentrating on them as hard as they are with their mobile market.

So what you are saying about "scraping the production" is just not happening. Also, lowering of price can actually make them more money than if they kept it high. I believe the iphone is making much more money today than it was when it first came out. The iphone actually forced other companies to emulate the design and features that it offers. The droid is a perfect example of this of verizon trying to compete in the market.

"Start up firms do not have any MR. They need time to build up sales, and they need sales to pay for their startup marketing. Firms start off with a negative MR and once they have broken even, they raise prices until they feel that a 1% hike on the price will give them more than a 1% backlash on sales. This is how the real world works. They do not maximize profit by cutting prices. Cutting prices is usually an effort to cut losses. "

No, this does not happen. My friends who have been running their own restaurant for 4 years now have not gone through this very thing you describe. First of all, their "start-up" marketing was non-existant. They basically marketed through word of mouth. And in reality, word of mouth is the strongest form of marketing, and they realized that too since most people who make reservations to their place say they heard about them from their friends. People will listen to their friends more than advertisers. That, or if there is some incentive, like coupons and discounts, which is how other places have been able to become sucssful(down in chicago, a place called the bagel uses groupon, which is what most of their customers have when they come in to eat there).

Take even gaming consoles for example. The Wii has been a huge selling console that was near impossible to find. For over 6 months, every time a store got a shipment in, it would sell out instantly. But of course, I am explaining the product's life cycle. Even with successful video games, they get cheaper, and even become "greatest hits." That is where a game that has sold over 1 million copies gets re-marketed for a cheaper price.

"

In fact, production is probably ceased as soon as mr *starts* to swing down

How do you explain loss leaders?"

To give Allan an example of this, think of gillette. Their company follows this. Hell, even the gaming industry does this too, mainly microsoft and Sony. Their consoles are sold at a loss. Even mobile phones, and printers are loss leaders as well.

"Marketing costs. If the returns on sales is less than the costs of the marketing, you need new strategy. You don't maximize your profit by cutting prices. You maximize your sales by cutting *some* prices *some* times."

Actually, you can maximize profits by cutting prices. Costco and Wal-mart have been successful on this very idea. Hell, even Costco managed to do what I thought was impossible and actually make blockbuster titles for video games significantly cheaper. Wal-mart failed because they could only sell them for like 30 cents less than say a gamestop. Costco does it $8 cheaper.

Jeepers Nate, you have verbal diarrhoea

Allan (and all): I've decided to do a post on this. It should appear soon.

Is that your way Allan of not giving a proper response? Just like how with "just visiting" gave a counter-example with product life cycle, you simply focus on the market that "wants everything new."

And yes Allan, you do maximize profits by cutting prices. Again, Wal-mart and Costco do just that.

Well, the literature seems to fall on all sides here. Most surveys indicate that raising the wage rate reduces employment:
http://www.nber.org/papers/w12663
Some indicate there is a role for a minimum wage along with a low income credit program:
http://ideas.repec.org/p/pri/cepsud/1099.html

Some indicate a lower minimum wage raises the incidence of obesity and some notice that it has a good effect on working women, but poorer on working men.

(all % numbers below are made up, but I am looking for research that backs them up!)
It would seem to me that there is a role in having a minimum wage rate and that the effect of this would depend very much on the average wage in the area having the rise. So, that a rise in minimum wage in the US to, say, 38% of the average wage would have little deleterious effect while a rise to the same minimum wage in, say, a US territory like Guam where AVERAGE wages are lower and thus the minimum wage is say, 55% of the average would have a MUCH larger effect.

All to say, is that as part of an overall approach to help the working poor, a minimum wage has a role to play.

@jim

To me, rising wages does not create prosperity, but is an effect of prosperity. When a country is doing very well, wages will rise. If rising wages created prosperity, then we can raise the minimum wage to $50 an hour and be very prosperous. Hell, we should see the countries with the highest wages be the most prosperous. Of course, that is not the case. China is arguably doing much better than the US in terms of production and growth, yet their minimum wage is much lower than ours. There is also the question "is it even enforced?" Just because a law is on the books, doesn't mean it is enforced. As we both know, there are some very silly laws that are in place in different states that are not enforced. For example, in Illinois, it is illegal to hang dice on your rear view mirror, or anything for that matter. A state trooper told me though no cop in their right mind would pull you over just for that. It is something they usually tag onto your ticket like if you were speeding.

But yes, I've heard different things. Some advocates of minimum wage say that the EITC is a much better tool in helping the poor than simply raising minimum wage.

But remember what Allan said, a rise to minimum wage raises all wages. So if that is true, then it is impossible for the minimum wage to get anywhere near the average wage.

http://jewishworldreview.com/cols/williams041410.php3

Minimum wage cruelty. It explains how minimum wage has hurt Samoa and how it drove away chicken of the sea international company.

He also shows that minimum wage is racist.

Quoted from the south africa wage board:

"the method would be to fix a minimum rate for an occupation or craft so high that no Native would likely be employed."

Read this quote from David Neumark about the history of minimum wage Allan:

In most developed nations, minimum wage laws in some form have existed for more than a century, starting with New Zealand in 1894 and Australia in 1896. In the United States, Massachusetts enacted the first minimum wage law in 1912. By 1923, 15 other states, the District of Columbia, and Puerto Rico had minimum wage laws on their books. By 1930, seven of the 17 minimum wage laws were declared unconstitutional, five others were repealed or not enforced, and the remainder were rendered ineffective by adjustments in contemplation of legal challenges.

By 1930. only 15 states had minimum wage laws. It wasn't "banned" as you claimed earlier in the US. It wasn't declared unconstitional. It still existed and the economy went into a depression regardless.

Source: http://www.thefreelibrary.com/The+best+anti-poverty+program+we+have%3F-a0203335454

"All to say, is that as part of an overall approach to help the working poor, a minimum wage has a role to play."
It doesn't just help the poor. Business depends on consumer spending, and no one spends their money faster than the poor worker. In the macro, the better the wages, the better the sales, and so putting the mminimum wage up is the very best way to support business.

"Some indicate there is a role for a minimum wage along with a low income credit program:"
Absolutely NOT!! Government is always looking for an excuse to expand bureaucracy, and such economic meddling makes the government bigger and more expensive, and usually has none of the benefits expected. Attempting to boost the minimum wage by government handouts means that employers are less inclined to give the raises that are deserved and are required to make the economy grow.

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