Do you buy more if the price goes up?

It is common sense that as the price of a good goes up, the less of it will be bought by consumers.  In fact, that is part of the law of supply and demand.  Rising prices depress demand while falling prices depress supply.  Or, conversely, Rising prices encourage supply and falling prices encourage demand.  Simple, right?  The important part to this is that prices rise or fall to a point where supply equals demand.  If there are 100 eggs and 200 hundred egg buyers, the price will rise until 100 egg buyers are priced out of the market.  Or, to take it the other way, if there are 200 eggs and only 100 buyers, the price will fall until another 100 buyers are lured into the market to buy the excess.  This price mechanism is part of Adam Smith's invisible hand.

Let us suppose the government got involved in the egg market and decided that, despite there being 200 eggs and only 100 buyers, the price of eggs should be 20% higher?  What would happen?  Well, some of those 100 buyers would be priced out of the market and there would be even more unsold eggs.  So, though the egg sellers have plenty of eggs for sale, they can't sell them because the government has instituted a price floor, a minimum price beneath which the good cannot be sold.  The market now has surplus eggs that will rot on the shelves.  The egg sellers who manage to unload their eggs on some buyers will be very appreciative of the government move since it has increased their profit per egg but those who are stuck with unsold eggs will not thank the government.

 

Happily, the government isn't putting in price floors, right?  Not as explicitly as the above example, certainly.  Actually, it is.  The minimum wage is a price floor and it has an identical impact on the labor market as it does in my fictional egg market.  The lucky eggs who get a job with the higher minimum wage will thank President Obama for his caring.  The unlucky eggs who don't get jobs will sit on the shelves and add to the youth unemployment rate (the minimum wage is almost exclusively for teens and college students, not family breadwinners, despite what the media reports).  So there is the tradeoff: have many people with a job getting $7.50 an hour or have fewer people getting $9 an hour while the rest have no job at all.

 

Government cannot tinker with the price of goods without impacting either the supply or demand, almost always in a harmful way.  The minimum wage should be zero.