For example, once you are familiar with supply and demand curves, you can already begin making predictions about the impact of price regulation. If you artificially lower the price of a good by government edict, the demand will exceed the supply, and you will get a shortage. (Try drawing a supply and demand curve on paper with price on the horizontal axis and draw a vertical line to the left of the supply/demand intersection if you don't see this.) If, on the other hand, you artificially raise the price, you'll get an unpurchased surplus.
This pattern is consistently seen in the real world, but it is rarely understood by people watching it.
For example, in 1973, the OPEC countries decided not to sell oil to the United States because of our support of Israel. There were, however, other producers of oil, including companies extracting it inside the United States itself. If the price of oil in the United States had been entirely based on market mechanisms, we would have expected the price to shoot up until demand fell enough to cross supply. There would have been no shortages, only a dramatic price rise. Additionally, Non-OPEC producers would have had a large economic incentive to find new ways to supply oil since the they could make large profits selling it, so supply would have eventually eased.
However, the price was not unregulated. The United States had price controls on all domestically produced oil. No one remembers this — you'll be hard pressed to find more than a passing reference to it in the Wikipedia article on the crisis, for example. What happens when you have government price caps? A shortage of course. At the artificially lowered price, demand exceeds supply. The gasoline rationing that immediately resulted was completely predictable, and yet almost no one understood it. The bulk of the population had no idea that they were victims of government price control policy. People instead usually blamed the oil companies for "profiteering", as though one could make more money by refusing to sell one's product than one could by selling it.
Today we are experiencing a significant rise in the demand for energy with a simultaneous tightening of supply, but there are no gas lines this time. Why is this? Because oil prices were decontrolled long ago, so the price merely rose until supply and demand met. Eventually, as oil supplies (which are finite) start to run low, the rise in prices will eventually drive people to use other sources of energy, without any need for outside interference.
Artificial price caps are not the only type of price regulation. Set a guaranteed price floor above the market clearing price, and demand drops while supply rises. Agricultural price supports have left us with things like vast government warehouses filled with cheese no one wants, made with milk from herds of cattle that we don't need. (The irony of the government deliberately raising the price of food while issuing food stamps to the poor who can no longer pay for it is rarely mentioned, but that's not our topic today.)
The minimum wage is an example of a price floor. The ideas behind it are as simple as they are incorrect. The advocates assume that wealth is some sort of finite resource that neither grows nor falls (the "zero sum" fallacy), that employers are a privileged exploiting class that unfairly pay people less than they are "worth", and that employers could choose to pay their employees any arbitrary wage we pick, but will deliberately pay low wages because they're mean people.
Thus, we assume that by forcing employers to pay some of their employees more, we will have "costlessly" increased the well being of low wage workers. Of course, in reality there are some pretty serious costs.
First, the supply and demand rule we've just studied means that the demand for low wage labor will necessarily fall. Some of the workers will get the wage increase, but others will no longer have jobs. Employers will look at the increase in their cost of labor and try to find ways to ameliorate it. Some may find that it is cheaper to buy more automated machines than to keep as many workers. Others might forgo an expansion, and perhaps others will cut employee benefits to make up for the increased cost of wages. One way or another, though, they'll be compelled to find a way to respond to their increased costs.
You might think this is a "mean" thing for employers to do, but in fact they have no choice. You as a consumer do not voluntarily buy the more expensive choice among equivalent products when you're out shopping, so producers are under tremendous pressure to minimize costs so that they can offer lower prices in the marketplace. If a producer lowers costs more than his competitors, he gains an advantage over them, and so the competitors have to follow suit or go out of business. No employer has an infinite pool of resources to draw on. Wages are set not by "exploiting employers", but by market pressures, just like every other kind of price.
Employers cannot unilaterally set wages. If they offer wages that are too low, they will not attract qualified employees. When you've looked for work, if there were two equally interesting jobs you could pick, and one offered twice as much money, would you pick the lower paying job? Could your boss offer you *any* salary without fear that you would seek another employer that paid more?
We are all employers at times, of course. Do you pick an arbitrary fee to pay your lawyer or plumber, or are you forced into a particular fee by the marketplace? If you wanted to, could you simply pay your plumber minimum wage? Of course not. No other employer has true control over wages, either. Employees are paid well because the market clearing price for their labor is high, or are paid little if the market clearing price for their labor is low. The market for labor is driven by supply and demand like all markets.
It is possible that in some industries, demand is sufficiently inelastic that employment won't drop much after a government imposed wage increase, because customers will absorb the increase in prices. However, those customers also have only finite resources available to them. If they pay more to one supplier, they then have less money to pay to other suppliers or workers. They will either employ fewer people, or purchase fewer goods (thus causing other suppliers to employ fewer people), but either way, the change will have negative effects.
Raising the cost of labor in the economy is thus not harmless — it reduces the amount that can be done with a given amount of resources. Increasing the minimum wage, no matter how well intentioned, creates unemployment for the poor and reduces economic output.
That brings up another point, which is that the economy is not a zero sum game. There isn't a finite pool of wealth out there which some mean people have seized and which others are being unfairly kept away from. The work we do every day increases the total wealth of the world. If I go into my workshop and build a chair, the wealth of the world is larger by the value of one chair. Every day, we make more and more things, raising the total wealth of the world. The reason that 7% of the U.S. population didn't have indoor plumbing in 1970 and that only 0.6% lack it now isn't because wealth has been redistributed — it is because there is a lot more wealth to go around with every passing day.
The government doesn't produce any wealth. Factories, software companies, farmers, and others are the ones producing wealth. All the government can do is make it harder for people to produce wealth or take wealth from one person and hand it to another. It can't actually make the pie larger on its own, but it can manage to drastically reduce the size of the pie by interfering. Only the people actually doing productive work can increase the size of the pie.
We see extreme cases of this in the third world. The reason people in Africa live in shacks and have to wear our cast-off clothing is not because we're mean and keep them from having all the wealth we've stolen from them. They have little wealth to steal in the first place. They are poor because their governments are run in a way that makes the creation and retention of wealth impossible. Unlike the booming Asian economies, where foreign factories are welcomed, few foreign companies "exploit" the poor of Africa, because the African governments have made running factories and businesses nearly impossible. Even indigenous entrepreneurs are regulated, shaken down and taxed into oblivion. If you want to make the poor wealthier, you have to stay out of the way of people who want to produce wealth. The more you get in the way, the poorer people will be.
So, we now turn our attention to New York State, where the legislature recently tried to raise the minimum wage to $7.15, an increase of nearly 40%. That's not a small adjustment by any means. Governor Pataki vetoed the legislation, saying that the minimum wage hike would put New York at a "distinct competitive disadvantage". This is a remarkably economically enlightened viewpoint. However, not all politicians in the state are this enlightened. Quoting the Newsday article I've just linked to:
Assembly Speaker Sheldon Silver called Pataki's veto "an outrageous slap in the face to tens of thousands of hardworking men and women in our state."
The assembly speaker appears to be basing this statement on the counter-factual belief system that I mentioned before. Repeating, this belief system claims that the economy is a "zero sum" game, that employers voluntarily choose to "exploit" people by paying them less than they are "worth", and that employers can choose to pay their employees any wage at all without impact upon them if they wish to. Therefore, these people reason, it must be the case that refusing to raise the minimum wage 40% is an attempt to continue the exploitation of the hard working men and women of New York State by evil employers, and that but for this veto thousands of people would have better lives without any negative repercussions.
As with most politicians, Silver shows a deep ignorance of how the economy actually works. This is rather ordinary. What I find unusual, and indeed praiseworthy, is that Pataki actually seems to have shown some considerable sense here, and was willing to stand up for his principles even though everyone "knows" that the minimum wage is "good".