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



 Imagine one day, the KIS students complain that $4 (including a drink) is too high for the food quantity and quality served to the students. In contrast, the JJ catering complains that $4 is too low for the food price regarding the wages of the workers. This is a common example of conflict between the eaters and the makers. Then, the eaters and the makers interact to set the price for the food. The government imposes a maximum price, price ceiling, which is the price that the food can't be sold above this price. Moreover, the government imposes another price called the minimum price. This is called the price floor, which the price cannot be sold below this price.
 * Introduction:**

Price floor: The minimum price of a good that can be sold. Tax incidence: The burden of tax shared among the consumers and suppliers. 
 * Words to keep in mind: **Price ceiling: The maximum price of a good that can be sold.

 **Price Ceiling Graph (Binding): **  **How Price Ceilings Affect Market Outcomes:** The price ceiling will result in two potential outcomes to the market. 1. When the equilibrium price is below the price ceiling, its not binding. No effect on the price/ quantity sold. 2. When the equilibrium price is above the price ceiling, its binding constraint on the market. Quantity demanded is higher than the quantity supplied. (Shortage) The market price equals the price ceiling. (In the graph above...Shortage= on Pceiling, Qs ~ Qp) - The sellers must divide the scare goods among many buyers due to the rise of shortage. - The rent control in the New York city is a great example of a price ceiling. 
 * Price ceiling** is the maximum price of a good that can be sold.

 The price floor will result in two potential outcomes to the market. 1. The price floor is not binding if the equilibrium price is higher than the price floor. 2. The price floor is binding if the equilibrium price is lower than the price floor. -When the equilibrium price is below the price floor, the quantity supplied is higher than the quantity demanded. (Surplus) Therefore, the binding price floor will result in surplus. (In the graph above... Surplus= on Pfloor, Qp ~ Qs) - The minimum wage is a great example of a price floor. 
 * How Price Floor Affect Market Outcomes:**
 * Price floor** is the minimum price of a good that can be sold.

//Video Explanation About How Price Ceiling and Price Floor Work //

media type="youtube" key="qin2rz8aKsk" height="344" width="425" align="center"

**Tax incidence **: The burden of tax shared among the consumers and suppliers.
 * <span style="color: #404040; font-family: Verdana,Geneva,sans-serif; font-size: 200%;"> Tax: **<span style="font-family: Verdana,Geneva,sans-serif;">

Step 1: Determine whether the law affects the supply curve or the demand curve. Step 2: Determine the way that the curve shifts. Upward? Downward? Step 3: See how the shift effects the equilibrium.
 * How Taxes on Buyers Affect Market Outcomes:**

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Main lessons: -Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium. -Even though the tax is levied on buyers, buyers and sellers share the burden of the tax. In the new equilibrium, buyers pay more for the good, and sellers receive less.

Step 1: Determine whether the law affects the supply curve or demand curve. Step 2: Determine the way that the curve shifts. Upward? Downward? Step 3: Examine how the shift affects the equilibrium.
 * How Taxes on Sellers Affect Market Outcomes:**

<span style="color: #9900ff; font-family: Georgia,serif;"> Main lessons: -Taxes on buyers and taxes on sellers are equivalent. - In the new equilibrium, buyers and sellers share the burden of the tax regardless of how the tax is levied. -Buyers pay more for the good, and sellers receive less. **<span style="color: #404040; font-family: Verdana,Geneva,sans-serif; font-size: 120%;"> Elasticity and Tax Incidence (the division of the tax burden) **<span style="color: #000000; font-family: Verdana,Geneva,sans-serif;">
 * How the burden of a tax is divided:**

(A):Elastic Supply, Inelastic Demand Graph The supply curve is elastic and the demand curve is inelastic. The price received by sellers falls only slightly. The price paid by buyers rises substantially. Buyers bear most of the burden of the tax.



(B): Inelastic Supply, Elastic Demand Graph The supply curve is inelastic and the demand curve is elastic. The price received by sellers falls substantially. The price paid by buyers rises only slightly. Sellers bear most of the burden of the tax.

<span style="color: #000000; font-family: 'Arial Black',Gadget,sans-serif; font-size: 120%;">Conclusion: We learned that the economy is governed by the laws of supply and demand any by government laws. Also, we learned about price floors, ceilings, price controls and taxes are common in the economy. The incidence of tax raises the price of a good, so the equilibrium quantity of the good falls. It does not depend on whether the tax is levied on buyers or sellers.


 * Bibliography 6 **<span style="display: block; font-family: Verdana,Geneva,sans-serif; text-align: left;">