In this chapter you will examine the effects of government policies that place a ceiling on prices, examine the effects of government policies that put a floor under prices, consider how a tax on a good affects the price of the good and the quantity sold, learn that taxes levied on buyers and taxes levied on sellers are equivalent.
Trang 1Supply, Demand and Government Policies
Chapter 6
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Trang 3Price Ceilings & Price Floors
Price Ceiling
A legally established maximum price at which a good can be sold (Rent Controls)
Price Floor
A legally established minimum price at which a good can be sold. (Price Supports for
Agriculture)
Trang 4Price Ceilings
Two outcomes are possible when the government imposes a price ceiling:
The price ceiling is not binding if set above
the equilibrium price
The price ceiling is binding if set below the
equilibrium price, leading to a shortage Binding means that there is an economic impact.
Trang 5A Price Ceiling That Is Binding
$3
Quantity of IceCream 0
Price of IceCream
Cone
2
Demand
Supply Equilibrium
price
Price ceiling Shortage
125 Quantity
75 Quantity
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Trang 6A Price Ceiling That Is Not Binding
$4
3
Quantity of IceCream Cones 0
Price of IceCream
Cone
Demand
Supply
Price ceiling
Equilibrium
price
100 Equilibrium quantity
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc
Trang 7Effects of Price Ceilings
shortages because Q D > Q S
Example: Gasoline shortage of the 1970s
nonprice rationing
Examples: Long lines, Discrimination
by sellers
Trang 8Price of Gasoline
Q1
Demand
Supply
Price ceiling
1. Initially, the
price ceiling
is not
binding
Trang 9The Price Ceiling on Gasoline Is
Binding
P1
Quantity of Gasoline 0
Price of Gasoline
Q1
Demand
S 1
Price ceiling
S 2 2. …but when
supply falls
P2
3. …the price ceiling becomes binding
4. …resulting in
a shortage.
Trang 10Rent Control
Rent controls are ceilings placed on the rents that landlords may charge their tenants.
Rent control can make housing more affordable.
With a price ceiling, you cannot go above the ceiling.
But what about the landlords?
Trang 11Rent Control in the Short Run
Quantity of Apartments 0
Rental Price of Apartment
relatively inelasticWhy is the supply curve vertical?
Trang 12Rent Control in the Long Run
Quantity of Apartments 0
Rental Price of Apartment
run?
…rent control
causes a large
shortage
Trang 13Price Floors
When the government imposes a price floor, two outcomes are possible.
The price floor is not binding if set below
the equilibrium price.
The price floor is binding if set above the equilibrium price, leading to a surplus Think of price floors as not being able to go below the floor.
Trang 14A Price Floor That Is Not Binding
$3
Quantity of IceCream Cones 0
Price of IceCream
Cone
100 Equilibrium quantity
Equilibrium price
Demand
Supply
Price floor 2
Trang 15A Price Floor That Is Binding
$3
Quantity of IceCream 0
80 Quantity
Surplus
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Trang 16Examples: The minimum wage, Agricultural price supports
State Minimum Wages
Trang 17The Minimum Wage
Quantity of
Labor 0
Wage
Equilibrium
wage
Labor demand
Labor supply
A Free Labor Market
Equilibrium employment
Trang 18Labor demand
Labor supply
Quantity supplied
Quantity demanded
Labor surplus (unemployment)
A Labor Market with a
Minimum Wage
Trang 19What are some potential
impacts of taxes?
Taxes are used to raise money for the
government.
Taxes discourage market activity.
When a good is taxed, the quantity sold is smaller. Buyers and sellers share the tax burden.
But who bears the burdentax incidence.
Trang 20Quantity of IceCream Cones 0
Price of IceCream
Cone
100 90
Supply, S1Equilibrium without tax
Impact of a 50¢ Tax Levied on
Trang 21Quantity of 0
Price of IceCream
Cone
100 90
Tax ($0.50) Equilibrium with tax
Trang 22The Incidence of Tax
In what proportions is the burden of the tax divided?
How do the effects of taxes on sellers compare to those levied on buyers?
The answers to these questions
Trang 23Elastic Supply, Inelastic Demand
Quantity 0
Price
Demand
Supply Tax
1. When supply is more elastic than demand
2. the incidence of the tax falls more heavily on consumers
3. than on producers.
Price without tax
Price buyers pay
Price sellers receive
Trang 24Inelastic Supply, Elastic Demand
Quantity 0
Price
Demand
Supply Price without tax
Tax
1. When demand is more elastic than supply
2. the incidence of the tax falls more heavily on producers
3. than on consumers Price buyers pay
Price sellers receive