Chapter+6

 = = =**Supply, Demand and Government Policies** =

Table of Content: 1. Title 2. Intro 3. Content 4. Conclusion 5. Glossary

By Elaine

This chapter is about how government policies affect the market! We learned from chapter 4 that in a //competitive market // buyers and sellers are forced to buy and sell at the //equilibrium price //.  Often suppliers are going to want to increase the price. To stop sellers from selling at extremely high prices, the government imposes a // price ceiling //. //Price ceiling//: a legal maximum on the price at which a good can be sold. A lot of times, buyers want to decrease the price. To stop buyers from lowering the price, the government imposes a //price floor //. //Price floor//: a legal minimum on the price at which a good can be sold.

**A Market with a Price Ceiling**
When the price ceiling is above the equilibrium price, nothing changes. AKA it's a //non-binding // price ceiling.

When the price ceiling is below the equilibrium price, shortage will arise. Price ceiling is //binding //. When the price ceiling is binding, sellers have to sell at the intersection of the price ceiling and the supply curve. This means that there is more demand than what the company can supply AKA //<span style="color: #259d20; font-family: 'Times New Roman',Times,serif; font-size: 150%;">SHORTAGE // When there is a shortage sellers ration the scarce good among the large number of potential buyers: 1) buyers who arrive early and wait in line get the product 2) sellers could sell to those they want to sell to. i.e. close relatives or friends
 * The second option is inefficient and unfair because the the good doesn't go to the buyer who values it the most**

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<span style="color: #efef2a; font-family: 'Comic Sans MS',cursive; font-size: 150%;">**Rent control in the Short run and the Long Run**
<span style="font-family: 바탕;">The price ceiling imposed only causes a small shortage of housing because in the //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 150%;">short-run //<span style="font-family: 바탕;"> supply and demand are //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 150%;">inelastic //<span style="font-family: 바탕;"> (sellers cannot produce houses in one day and buyers don't just buy or give up a house suddenly)

However, in the //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 150%;"> long-run //<span style="font-family: 바탕;">, supply and demand are //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 150%;">elastic //<span style="font-family: 바탕;"> (sellers can make or eliminate more houses and buyers can buy or give up houses in the long-run)


 * Although rent control keep rents low, it also discourages landlords from maintaining their building thus makes housing hard to find**

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<span style="color: #365df7; font-family: 'Comic Sans MS',cursive; font-size: 150%;">**A Market with a Price Floor**
<span style="font-family: 바탕;"> When the government imposed price floor is lower than the equilibrium price, nothing changes. AKA it's a //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 150%;">non-binding //<span style="font-family: 바탕;"> price floor.

However when the price floor is above the equilibrium price, there will be a surplus in the good. Price floor is //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 150%;">binding //<span style="font-family: 바탕;">. The price floor forces the producers to produce at a price where buyers demand less. At the price floor price, buyers won't buy all the product that sellers produce so the left over is //<span style="color: #259d20; font-family: 'Times New Roman',Times,serif; font-size: 150%;">surplus //. When there's a surplus sellers who appeal to the personal biases of the buyers are better to sell their goods. <span style="color: #f96b24; font-family: 'Comic Sans MS',cursive; font-size: 200%;"> Sources: -http://en.wikipedia.org/wiki/File:Ineffective_Price_Floor.svg -http://upload.wikimedia.org/wikipedia/en/thumb/e/e9/Surplus_from_Price_Floor.svg/200px-Surplus_from_Price_Floor.svg.png

**<span style="color: #f96b24; font-family: 'Comic Sans MS',cursive; font-size: 150%;">Minimum Wage as Price Floor **
When a government imposes a minimum wage (to protect the the suppliers aka workers) above the equilibrium price, there's a surplus in labor force. //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 150%;">Surplus in labor force = Unemployment = Bad //
 * Although minimum wages increase the income of some people, it causes others to be unemployed**

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<span style="font-family: 바탕;"> <span style="color: #365df7; font-family: 'Arial Black',Gadget,sans-serif; font-size: 140%;">

===**<span style="color: #efef2a; font-family: 'Comic Sans MS',cursive; font-size: 140%;"> <span style="color: #efef2a; font-family: 'Comic Sans MS',cursive; font-size: 210%;"> <span style="color: #bd4dea; font-family: 'Comic Sans MS',cursive; font-size: 150%;">Tax Incidence (government impose tax to raise revenue for public purposes): <span style="color: #bd4dea; font-family: 'Comic Sans MS',cursive; font-size: 112.5%; text-decoration: line-through;"> <span style="color: #bd4dea; font-family: 'Comic Sans MS',cursive; font-size: 150%; text-decoration: line-through;"> <span style="color: #ec181f; display: block; font-family: 'Comic Sans MS',cursive; font-size: 150%; text-align: center;"> How tax affects people in a market <span style="color: #ec181f; font-family: 'Comic Sans MS',cursive; font-size: 225%;"> **=== Let's say the government decides levy tax on //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 150%;">buyers // ... who want McFlurries

To determine how tax affects the market, you must take //<span style="color: #79e240; font-family: 'Times New Roman',Times,serif; font-size: 140%;">3 steps //: 1) Decide whether the law affects the supply curve or demand curve: //Initial impact is on <span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 120%;">demand curve since the// <span style="color: #000000; font-family: Arial,Helvetica,sans-serif;">buyers //have to pay more.// 2) Which way does the curve shift?: //Tax makes price higher => buyers are less attracted to McFlurries => value of demand lowers => <span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 120%;">D curve shifts down and left <span style="color: #f96b24; font-family: 'Times New Roman',Times,serif; font-size: 120%;">***D curve shifts down by the size of the tax*** // 3) How does the shift affect the equilibrium?: //As you can see in the graph (video), when demand decreases, not only does the <span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 120%;">equilibrium price fall, but the <span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 120%;">equilibrium quantity falls as well.// media type="file" key="econ tax.3gp" width="300" height="300"

Now let's say the government levy tax on //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 140%;">sellers //... McDonald's Take the same //<span style="color: #79e240; font-family: 'Times New Roman',Times,serif; font-size: 140%;">3 steps //: 1) //Initial impact is on the <span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 120%;">supply curve since the cost to produce more increased.// 2) //Tax makes the cost to produce higher => sellers are less willing to produce => supply lowers => <span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 120%;">S curve shifts up and left // //<span style="color: #f96b24; font-family: 'Times New Roman',Times,serif; font-size: 120%;">***S curve shifts up by the size of the tax*** // <span style="color: #b500ff; font-family: Impact,Charcoal,sans-serif; font-size: 120%;"> 3) When supply decreases, the //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 120%;">equilibrium price rises // and the //<span style="color: #ec181f; font-family: 'Times New Roman',Times,serif; font-size: 120%;">equilibrium quantity falls //. media type="file" key="econ tax 2.3gp" width="300" height="300"

SOOOO IMPORTANT:
 * Taxes discourage market activity b/c //**1. quantity of good sold is smaller and 2. buyers pay more for the good while sellers receive less.**//
 * **//*//**//It doesn't matter who the tax is levied on. Both buyers and sellers share the burden of the tax*//

===<span style="color: #b500ff; font-family: Impact,Charcoal,sans-serif; font-size: 120%;"> <span style="color: #5d7bf4; font-family: 'Comic Sans MS',cursive; font-size: 150%;">Tax Elasticity <span style="color: #164abb; font-family: Tahoma,Geneva,sans-serif;"> ===

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//<span style="color: #efef2a; font-family: 'Times New Roman',Times,serif; font-size: 120%;">***Tax burden falls more heavily on the side that is less elastic.*** // <span style="color: #54db43; font-family: 'Times New Roman',Times,serif; font-size: 130%;">Watch the video to learn why! media type="file" key="Econ.3gp" width="300" height="300" Enjoy :]<span style="font-family: 바탕;">

===<span style="color: #79e240; font-family: 'Comic Sans MS',cursive;"><span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">Conclusion //<span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">: // ===

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//<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">1) Price ceiling below equilibrium price = Shortage 2) Price floor above equilibrium price = Surplus 3) Tax, whether imposed on buyers or sellers, gives tax burden on both buyers and sellers 4) Tax burden is heavier on the side that is less elastic. //

<span style="color: #c0c0c0; font-family: 'Comic Sans MS',cursive; font-size: 150%;">__Glossary__ <span style="color: #000000; font-family: Arial,Helvetica,sans-serif;"> 1. Price Ceiling- legal max price on a good 2. Price Floor- legal min price on a good 3. Tax Incidence- how the burden of a tax is shared