Question

Suppose a law is passed that requires teachers to be paid the same wage as other college graduates who work in business. Predict the effects of this law on the market for teachers.

Answer 1

On an average, a college graduate working for business earns more than a college graduate who goes into teaching. Therefore, if such as low is passed, this will create a binding price floor in the market for teachers. In the case of a binding price floor, the minimum market price is set above the equilibrium price. A binding price floor creates a surplus. When teachers are paid the same wage as other college graduates who work in business, more college graduates want to become teachers. Therefore, the supply of teachers increases. However, at the higher wage level, school and colleges would like to hire less number of teachers. So, increased supply and reduced demand would create a surplus of teachers.