Chapter+6+Supply,+Demand,+and+Government+Policies+JBS

=**Chapter 6 Supply, Demand, and Government Policies JBS ** = = = 

**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



**Controls on Prices **

 * Consumers and buyers have different goals.


 * Consumers want a lower price.

 -> Because two groups have such conflicting goals, a "governmental, legal maximum" is needed.
 * Sellers want s higher price
 * Legislated maximum : price ceiling


 * Legislated minimum : price floor



**How Price Ceilings Affect Market Outcomes**
 The market is not binded when the price that balances supply and demand is below the ceiling. If the equilibrium price is above the price ceiling, the ceiling becomes the binding constraint on the market. Shortage happens when binding happens.

Quantity of a good < demand of a good Rationing of a good is developed as a shortage happens. When the government imposes a binding price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers

//Example//: Rent prices In order to make sure that all of the families in all classes can afford the rents, price ceiling is imposed. Even in this case, rationing STILL happens. The rationing would be... waiting lists. <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

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<span style="color: #0000ff; font-family: Tahoma,Geneva,sans-serif;">**How Price Floor Affect Market Outcomes**
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: Tahoma,Geneva,sans-serif;">Price floors are also imposed to maintain prices at other than equilibrium levels, because the equilibrium level is below the price floor. When the equilibrium price < price floor, binding constraint happens.!

Surplus happens when binding happens. quantity of a good > demand of a good Price floors and surpluses also lead to undesirable rationing mechanisms.

Example : minimum wage Because quantity of labor supplied > quantity demanded, unemployment happens. <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

==<span style="color: #0000ff; font-family: Tahoma,Geneva,sans-serif;">**<span style="color: #0000ff; font-family: Tahoma,Geneva,sans-serif;">Price Control: To Protect Poor or Companies **<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> == <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Price Floor || <span style="font-family: Tahoma,Geneva,sans-serif;">Price Ceiling ||
 * * Wage / Employment: more people will willing to work because of limited wage
 * Cause surplus
 * Surplus of Labor causes unemployment || * Cause Shortage ||

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<span style="font-family: Tahoma,Geneva,sans-serif;">**How does tax on buyers affect market outcomes?** __Step one.__ tax is on the demand of a good. Supply curve is not affected, yet buyer's demand goes down because tax is now levied. shifts the demand curve.

__Step two.__ direction of the shift. The demand curve would shift to the left(downward) The total cost of a good is not including the tax. people would demand less if the price is higher.

__Step three__. compare the initial equilibrium and the new equilibrium.

Because sellers sell less and buyers buy less in the new equilibrium, the tax on good reduces the size of a market.

__SELLERS are also affected.__


 * How does tax on sellers affect market outcomes?**

__Step one__. tax is on the supply of a good. Supply curve is shifted, even though the demand curve shows no change.

__Step two.__ The supply curve would shift to the left ( upward)

In order to compensate the loss that one got from the tax, the firms would shift the supply curve upward.

__Step three.__ The equilibrium quantity falls, the tax on good reduces the size of a market.

BUYERS are also affected.

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<span style="font-family: Tahoma,Geneva,sans-serif;"> 1. Tax discourages market activities. Quantity of a good sold is smaller 2. Buyers and sellers share the burden of taxes 3. Taxes on buyers and taxes on sellers are equivalent

<span style="font-family: Tahoma,Geneva,sans-serif;">**Buyers and Sellers share the burden of tax!**

==<span style="color: #0000ff; font-family: Tahoma,Geneva,sans-serif;"><span style="color: #0000ff; font-family: Tahoma,Geneva,sans-serif;">Tax Incidence and Elasticity <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> == <span style="font-family: Tahoma,Geneva,sans-serif;">A tax burden falls more heavily on the side of the market that is less elastic. When the good is taxed, the side of the market with fewer good alternatives cannot easily leave the market and must, therefore, bear more of the burden of the tax.



<span style="font-family: Tahoma,Geneva,sans-serif;">__A. Elastic Supply, Inelastic Demand (Left) :__ When supply is more elastic than demand, the incidence of the tax falls more heavily on consumers than on producers.

__B. Inelastic Supply, Elastic Demand (Right) :__ When demand is more elastic than supply, the incidence of the tax falls more heavily on producers than on consumers.

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<span style="color: #0000ff; font-family: Tahoma,Geneva,sans-serif;">Video
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