Threhold Price Paradox

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Threshold Price Paradox:
Production requires time which is limited. People are willing to supply at a threshold price or above, but people are unable to demand at that price due to the lack of money. If the price is at the threshold, supply will go on increasing.

For example, in case of teacher, if their salary is 20,000 most are likely to hold a job, but below the threshold say 10,000 most are unlikely to join as teacher. 

How will the perfect competition solve it? Because in this condition, competition will never push the prices down below the threshold, or if employees agree with little (at below threshold price)  due to unemployment but it makes them unproductive in work as well as life.  In this condition most of the people demand are never met. 

In case of teacher, no competition will decrease the price, because taking a class requires about 6 hours of preparation daily. If teachers agree with salary less than 20,000, then they will compromise their time in preparation, or health or increase the class size that makes teaching not much effective. 

Price floor causes wastage, but this is not always the case for example content writers, teachers, customer care or other technical and intellectual services that don't use natural resources for production don't create wastage and many of the services like teachers produce a positive externality. 

Buyers competes with other buyers and buyer obtain goods by biding higher, and sellers compete with other sellers by offering to sell at lower prices. The buyer with the highest bid gets the item and seller with the lowest price is able to make the sell. This is how price is set. What if average biding by buyers don't reach the threshold price? And sellers can't offer the quality service. 

Prices are determined by demand and supply, but it is also opposite, that is prices determine demand and supply. 

In this example, poor people are unable to present the real demand due to high required threshold price, this lowers the prices and lead to unproductive teachers.  

Govt regulation by setting price floors and collective funding (like taxes) and investments can solve this dilemma keeping other attributes of perfect competition unchanged. 



Modern Principles of Economics: Tyler Cowen, Alex Tabarrok



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