Chapter+6+Supply,+Demand,+and+Government+Policies+(Joon,+Scott,+and+Steven)

Supply, Demand, and Government Policies




 * Key Terms **


 * Price Ceiling**: a legal maximum on the price at which a good can be sold
 * Price Floor**: a legal minimum on the price at which a good can be sold
 * Tax Incidence**: the manner in which the burden of a tax is shared among participants in a market

So far, we've talked about economy in its perfect market economic system. That is, an economy that flows perfectly with no outside aids. Such economy is an ideal plan everyone wants to have; however, such economy is also an impossible plan for there are too many flaws in between. Thus, we have the government stepping in, which tries to put certain laws to help economy to flow better. In this chapter, we will look at how the government policies affect the supply, demand, and elasticity of a market economy.

**How Price Ceiling Affect Market Outcomes**

To make sure no good is sold at a ridiculous high price, the government has decided to create price ceiling. There are two types of price ceilings that the government can impose.

If the price ceiling is above the equilibrium, it is a price ceiling that is not binding.

But if the price ceiling is below the equilibrium, it is a price ceiling that is binding.

(the dashed green line represents the price ceiling that is not binding) (the solid green line represents the price ceiling that is binding)

There is not much of an effect is the price ceiling is not binding. But if the price ceiling is binding, it can cause shortage. That is, the quantity demanded can outnumber the quantity supplied. Thus, not all people will get what they want.



**How Price Floors Affect Market Outcomes**

On the other hand, government may create the exact opposite, price floor, to make sure no good is sold at a ridiculously low price.Similarly, there are too types of price floors that the government can impose.

If the price floor is below the equilibrium, it is a price floor that is not binding.

If the price floor is above the equilibrium, it is a price floor that is binding.

(the dased green line represents the price floor that is not binding) (the solid green line represents the price floor that is binding)

Once again, no affect is really made if the price floor is not binding. But if the price floor is binding, it can cause surplus. That is, the quantity supplied can outnumber the quantity demanded. Thus, not all suppliers will be able to sell their goods.



Podcast giving examples of both Price Ceiling and Price Floor



Why of course. How can we forget about TAXES when dealing with government policies on our economy?!

In order to see how taxes on sellers or buyers affect market ourcomes, we follow three simple steps.
 * 1) Determine whether the tax imposed affects the demand or supply curve
 * 2) Determine which way the curve shifts (left or right)
 * 3) Compare the shifted curve with the its equilibrium


 * How Taxes on Buyers Affect Market Outcomes **

We follow the previous three steps to see how taxes on buyers can affect the market outcomes


 * 1) Obviously, the tax is imposed on the demand curve
 * 2) The quantity of demand decreases, thus, the curve shifts to left
 * 3) Overall, both sellers and buyers share equal amount of burden as the new equilibrium shows that both demand and supply have decreased


 * How Taxes on Buyers Affect Market Outcomes **

Similarly, we follow the three steps to see how taxes on sellers can affect the market outcomes


 * 1) This time, the tax is imposed on the supply curve
 * 2) The quantity of supply decreases, thus, the supply curve shifts to right
 * 3) Overall, both sellers and buyers share equal amount of burden again as the new equilibrium shows that both demand and supply have decreased

**Elasticity and Tax Incidence**

However, the burden does not always fall equally to supply and demand. The elasticity can determine whether supply or demand gets more or less burden.

Just remember that: //if the side of the market (supply or demand) is less elastic, it will face more burden//

Why? It is because the consumers or suppliers of the side of the market with less elasticity will tend to stay firm to the market despite the tax burdens (remember, elasticity measures the willingness of the buyers to purchase or sellers to sell goods after the change of goods' prices).

In this chapter, we've focused more towards the reality of economy. That is, the economy with government's interactions. For years, there have been numerous debates regarding with government's taxation and price limits on various different products. However, it is essential for us to understand that these policies are done for everyone's benefits.


 * Review Questions**


 * 1) Shortage / surplus occurs when the price ceiling / price floor is what?
 * 2) Which side tends to receive more burden of taxes? The suppliers or the demanders?
 * 3) When the side of the market is less elastic, then ...

Answers
 * 1) unbinding
 * 2) Both suppliers and demanders receive the equal amount of burden. The only difference of burden between the two sides of the market occurs when there's elasticity involved.
 * 3) that side of the makret will face more burden of tax.

Student Produced Resource: [|Quizlet Chapter 6] Sources

http://questgarden.com/15/11/6/060129180530/process.htm http://microecon201.wikispaces.com/Price+ceiling http://instruction.blackhawk.edu/ghoffarth/economics/ecounit3.htm http://commons.wikimedia.org/wiki/File:Basic_price_floor.png http://en.wikipedia.org/wiki/File:Surplus_from_Price_Floor.svg