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c10competitive markets applications.qxd 7/15/10 4:58 PM Page 411

10.2 PRICE CEILINGS AND FLOORS 411
To see how producer surplus, net economic benefit, and deadweight loss are
affected by the minimum wage, we need to recognize that all the suppliers of labor
between points Z and T on the supply curve will want to work, but only some of them
will find jobs. We will determine the possible range of producer surplus (i.e., maximum
producer surplus and minimum producer surplus) by assuming, in Case 1, that the
most efficient workers find jobs, and in Case 2, that the least efficient workers find jobs.
• Case 1 (maximum producer surplus). The most efficient workers find jobs (i.e., work-
ers between points Z and W on the supply curve; the other workers, those be-
tween points W and T, are unable to find jobs even though they are willing to
work at $6 per hour). Producer surplus is the area above the portion of the sup-
ply curve between points Z and W and below the wage rate ($6 per hour) (pro-
ducer surplus areas C E H I); this is the maximum possible producer
surplus with the minimum wage. The net economic benefit consumer surplus
producer surplus areas A B C E H I. The deadweight loss net
economic benefit with no minimum wage net economic benefit with the min-
imum wage (areas A B C E F H I J) (areas A B C
E H I) areas F J.
• Case 2 (minimum producer surplus). The least efficient workers find jobs (i.e., workers
between points X and T on the supply curve), 10 which means that workers be-
tween points Z and X on the supply curve will be unable to find jobs, despite
their willingness to work at $6 per hour. Producer surplus is the area above the
portion of the supply curve between points X and T and below the wage rate
($6 per hour) (producer surplus areas E F G I J); this is the minimum
possible producer surplus with the minimum wage. The net economic benefit
consumer surplus producer surplus areas A B E F G I J.
The deadweight loss net economic benefit with no minimum wage net
economic benefit with the minimum wage (areas A B C E F H
I J) (areas A B E F G I J) areas C H G. The dead-
weight loss is larger than in Case 1 because producer surplus is smaller when
less efficient workers replace more efficient workers.

These two cases define upper and lower limits on the producer surplus and dead-
weight loss from a minimum wage law. The actual producer surplus and deadweight
loss typically falls in between the levels in these two polar cases, depending on which
workers find the available jobs.
Several simplifying assumptions are important in the analysis of minimum wage
laws. First, we assume that the quality of labor does not change as the minimum wage
rises. It is sometimes suggested that employers are able to hire better workers at
higher wages. If this is the case, the analysis would need to be modified to recognize
that the quality of labor changes as the wage rate rises. Also, a minimum wage law in
one market may affect wage rates in other markets, ultimately affecting the prices of
many goods and services. Finally, it is important to note that our discussion of the ef-
fects of a minimum wage law is a partial equilibrium analysis. To analyze the economy-
wide impact of a minimum wage law, one would want to use a general equilibrium
analysis using tools like those presented in Chapter 16.
Empirical studies of the effects of minimum wages in some industries have suggested
that the effects of a minimum wage law may not be as predicted with the competitive

10 We do not consider workers to the right of point T on the supply curve because they would not be
willing to take jobs at a wage of $6 per hour.