This document discusses several major economic issues and applies concepts of supply and demand to analyze them. It covers the economics of agriculture, long-run decline of farming, crop restriction programs, impact of taxes, minimum wages, energy price controls, and different forms of rationing. For each topic, it provides background, analyzes the issue using supply and demand graphs, and discusses the effects on prices, quantities, consumers, and producers. The overall document takes key economic concepts and applies them to real-world policy issues across different industries.

1. Application to Major Economic Issues
i. The Economics ofAgriculture
ii. Long-Run Relative Decline of Farming
iii. Crop Restriction
iv. Impact of a tax on price and quantity
v. Minimum floors and maximum ceilings
vi. The minimum-wage controversy
vii. Energy Price Control
viii. Rationing by Queues, Coupons or Purse

2. The Economics of Agriculture
First application of supply and demand analysis is from agriculture sector. The second
application of supply and demand is from the effects of government interventions.
Let us study the first case i.e. long-Run Relative Decline of Farming
Long-Run Relative Decline of Farming
Farming was once the strongest as well as largest production industry. Although today, many
people think that farming is a backward business however studies shows that there was a sharp
increase in the productivity from agricultural sector comparable to other economy industries.
Price r income of the farming products have been decreased due to the increase in the
income/price of the economy products.

3. Over decades, prices of farm products have declined 2% per year comparable to general price
level.
Median family income has more than doubled income of their farming products ceased. That’s
how decline has effected farm families.
Unit of inputs helps to increase in the productivity of farm products than
in any other sectors.
Agricultural Distress Results from Expanding Supply and Demand
1. There is a modest increase in the demand for food i.e. basic necessities. That is why the
demand shift is small in comparison to average increase in the incomes.

4. 2. Due to innovation factors in inputs the supply has been increased sharply comparable to
the demanded quantity.
3. The demand here is in-elastic.
4. Decline in farm incomes due to the rapid increase in supply. Supply curve is shifted from
S to S’.
Crop Restriction
Crop restriction can be considered as a remedy for the decline faced by farming sector over the
decades.
1. Government have taken many steps to help farmer by providing them incentives.
2. By raising prices, by curbing imports through quotas or tariffs.
3. Sometimes when farmers do not agree for the production of crops on their lands,
government send them cheques or by provides them funds so they can use their land for
production of farming products
.

5. Crop RestrictionPrograms Raise both farm price and farm incomes
1. In this, government asks every farmer to reduce their supply, thus supply has been shifted
from S to S’.
2. There is an increase in the price from A to B and thus supply in restricted.
3. As the demand for food or farming products here is in-elastic, crop restriction plays an
important role by raising the prices of the products as well as causing increase in the
revenue of the farming sectors.
4. Consumer gets to buy farming products at relatively higher price and somehow gets hurt.
Restriction helps in raising the income of one group on the expense of consumer i.e. the gain to
farmers is less than the harm to consumers caused by raising prices.

6. Impact of Tax on Price and Quantity
i. For the determination of who actually bears the burden of tax, supply and demand
analysis is essential.
ii. Prudent legislators avoid sharp increase in prices of products without pointing out the
consequences that can be faced by taking such a move.
iii. Incidence is considered important as this tells about the “the ultimate economic effect on
tax on the real incomes of producers and consumers.
iv. By increasing the price two consequences will be faced
 Consumer if willing to buy products at higher prices will bear the tax burden
 If customer cuts back so sharply then it will shifted towards the producers.
Gasoline tax falls on both customer and consumer

7. i- The price is increased from $2 to $4 in retail market which has caused upward shift in
supply.
ii- Demand curve for gasoline is in-elastic. Demand Curve does not shift as the quantity
demanded at each retail price is same even after the increase in gasoline prices.
iii- As the supply shifted upward from $2, the reason is that producers are willing to sell
at retail/net price.
iv- Because of the supply shift the retail price is higher. New equilibrium is shifted to E’.
v- Supply in relatively price-elastic while demand is price-inelastic.
Subsidies:
If taxes are used to discourage consumptions of products, subsidies are used to
encourage production.
General Rules on Tax Shifting
i- If demand is inelastic relative to supply, then it is shifted towards customer.
ii- If supply is inelastic relative to demand, then it is shifted towards producer/seller.
Minimum Floors and Maximum Ceilings:

8. Price Ceiling is where the shortage of supply happens.
i- A price ceiling is a legal maximum price, but a price floor is a legal minimum price
and, consequently, it would leave room for the price to rise to its equilibrium level. In
other words, a price floor below equilibrium will not be binding and will have no
effect.
ii- A price floor is the lowest legal price a commodity can be sold at. Price floors are
used by the government to prevent prices from being too low. The most common
price floor is the minimum wage--the minimum price that can be payed for labor.
The Minimum-Wage Controversy
In 1938, after a hard battle with the U.S. Supreme Court, Franklin Roosevelt finally got a
constitutionally acceptable federal minimum wage law enacted. The Fair Labor Standards Act set
25¢ an hour as the national minimum wage, with an automatic increase to 40¢ in 1945; it also
provided for time-and-a-half for overtime in a work-week gradually scaled down from 44 to 40
hours. The law covered only workers in major industries engaged in interstate commerce it was
mainly aimed at the plight of poorly paid textile workers in the South, did nothing for housemaids
or migrant farm workers.
i. “Minimum wage is defined as the lowest amount that employers can legally pay their
workers per hour of labor.”
ii. Most jurisdictions do have laws in place to enforce a minimum wage. However, there are
both benefits and drawbacks of this type of policy. Many supporters of minimum wage say
that it increases the standard of living and keeps people out of poverty. Those who are

9. opposed to it tend to believe that it increases unemployment and harms the less skilled
workers.
iii. The first minimum wage law was passed in New Zealand in 1894. Since then, many other
nations have adopted similar policies. In the United States, the current minimum wage is
$7.25. The state of Washington has chosen to establish a higher minimum wage of $8.67.
These rates are not established randomly. In fact, they are the result of much research in
the areas of economics, standard of living and inflation. Labor supply and the effects of
rising unemployment are also considered when establishing minimum wage.
iv. Minimum wage laws were established and are upheld with certain goals in mind. Those
who support minimum wage laws usually believe that these goals are being adequately
achieved and that this alone is enough justification to keep the laws in place. Minimum
wage was initially established to reduce poverty. Establishing a minimum wage in the
United States helped do away with sweat shops and insures that people are paid properly
for their work. Minimum wage also protects younger workers and minorities from being
paid less than others to some extent.
Proponents of Minimum Wage
Many do believe that minimum wage laws achieve these goals. They do ensure that workers on
the low end of the pay scale are not underpaid because of their gender or race. They also do ensure
that workers are given a fair wage. However, their effect on society as a whole and on those who
are not currently employed is questionable. Supporters of minimum wage also believe that a

10. minimum wage stimulates consumption and thus puts more money into the economy by allowing
low paid workers to spend more. They also believe that it may increase the work ethic of those
who are paid little and thus benefit employers. It also encourages people to join the work force,
rather than seek other illegal means of earning money such as selling drugs or prostitution.
Opponents of Minimum Wage
Some people who are opposed to the idea of minimum wage believe that it is not accomplishing
the goals it was designed to meet. In several instances, employment has decreased more than the
increase in wages and thereby overall earnings are still reduced. Businesses are sometimes forced
to hire fewer employees because they must pay minimum wage. Thus, fewer people have a job.
Studies also show that very few low-wage workers actually come from families in poverty. Thus,
minimum wage is more often imposed on the sixteen-year-old worker with his first job than on
people who would otherwise be unemployed.
Other opponents of minimum wage believe that it can cause price inflation as businesses must
raise their prices to accommodate the higher wages. They also believe it discourages further
education of the poor. The United States currently has laws in place to ensure a minimum wage.
Whether or not these laws should remain in place is a matter of debate. There are benefits and
downfalls to minimum wage laws and nothing is cut and dry.

11. Effects of a Minimum Wage
The earliest studies of the employment effects of minimum wages used only national variation in
the U.S. minimum wage. They found elasticities between −0.1 and −0.3 for teens ages 16–19, and
between −0.1 and −0.2 for young adults ages 16–24. An elasticity of −0.1 for teens, for example,
means that a 10% increase in the wage floor reduces teen employment by 1%. Newer research
used data from an increasing number of states raising their minimum wages above the federal
minimum. The across-state variation allowed comparisons of changes in youth employment
between states that did and did not raise their minimum wage. This made it easier to distinguish
the effects of minimum wages from those of business cycle and other influences on aggregate low-
skill employment. An extensive survey by Neumark and Wascher (2007) concluded that nearly
two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing
ones, found consistent evidence of job loss effects on low-skilled workers.
Energy Price Controls

12. Price controls are governmental restrictions on the prices that can be charged for goods and
services in a market. The intent behind implementing such controls can stem from the desire to
maintain affordability of goods, to prevent during shortages, and to slow inflation, or, alternatively,
to ensure a minimum income for providers of certain goods or a minimum wage. There are two
primary forms of price control, a price ceiling, the maximum price that can be charged, and a price
floor, the minimum price that can be charged.
The United Arab Emirates is moving prices of gasoline and diesel toward deregulation effective
Aug. 1.The Ministry of Energy said a committee will set prices monthly in accordance with
average international levels. Chaired by the energy ministry undersecretary, the committee
includes the undersecretary of the Ministry of Finance and the chief executive officers of ADNOC
Distribution and Emirates National Oil Co. According to the energy ministry, prices last year were
$1.67/gal for regular gasoline, $2.42/gal for diesel in Abu Dhabi, and $3.52/gal for diesel in
northern emirates.
Rationing
“Rationing is the controlled distribution of scarce resources, goods, or services, or an artificial
restriction of demand. For example, scarce products can be rationed using queues.”
Rationing by the Queue
Several types of rationing and queue mechanisms are compared in a framework of general
equilibrium type models under gross substitutability and normality assumptions about consumers'

13. Marshallian demand. During transition from rationing and queues to a market system, a group of
low income people loses. The transition involves larger losses for this group if black markets
prevail under rationing or queues, while a group of high income consumers gains. Some other
comparative statics results are developed for a queue model with black markets.
Rationing by Coupons
These coupons were among the almost five billion gasoline rationing coupons which were
produced in response to the 1973-74gasoline shortage at the direction of the Federal Energy Office.
But national gas rationing never happened and the coupons were never used. On October 18, 1973,
the Arab members of the Organization of Petroleum Exporting Countries (OPEC) stopped the flow
of oil to the United States in response to the United States’ support of Israel during Yom Kippur
war with Syria and Egypt. Prior to this the United States, like other industrialized nations, had
become accustomed to and dependent on cheap and abundant gasoline. A gallon of gasoline cost
about 35 cents.
After October 18, the price of gasoline rose immediately and its supply became uncertain. There
were long lines at service stations to buy gasoline. In some cases, service stations themselves could
not acquire gas. Theft of gas by siphoning from vehicle fuel tanks became common. To restore
order, state legislatures in those states most affected by the shortage implemented a simple form

14. of rationing. Drivers whose license plates had an odd number could purchase gas on the odd-
numbered days of the month and those whose plates had an even number could purchase gas on
the even days of the month. This helped, but the shortage worsened as time went on.
The government then proposed nationwide gasoline rationing, as had occurred during World War
II. On December 28, 1973, William E. Simon, head of the Federal Energy Office, announced the
Bureau of Engraving and Printing would print gasoline rationing coupons. The Bureau, aware it
would need assistance, signed contracts with the US Bank Note Company and the American Bank
Note Company to print a portion of the coupons and furnish them with engraved dies. Printing
began on January 25, 1974.
References
Paul, Gilkes. "Rationing Coupons Sell to Two Collectors." Coin World March 2003.
"Rationing Coupons Shredded." New York Times June 2, 1984.
Rudel, Thomas K. "Social Responses to Commodity Shortages: The 1973-74 Gasoline
Crisis." Human Ecology.

15. Topic:
Application to Major Economic Issues
Submitted to:
Ma’am Maimoona Sajid
Submitted by:
Mudaseera Muhamamd
Mariam Amjad
(BBA-III)
Submission Date:
02-10-2017
Department:
Management Science
National University of Modern Languages