CHAPTER+6+.+SUPPLY+DEMAND+AND+GOVERNMENT+POLICIES+;)

=Chapter 6. Supply Demand and Government Policies = = = 

Objectives

 * 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
 * See how the burden of a tax is split between buyers and sellers

Supply, Demand, and Government Policies

 * In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities
 * Not everyone may be satisfied even though equilibrium conditions are efficient

=TOPIC 1 = = =

<span style="font-family: 'Lucida Console',Monaco,monospace;">Price Controls
<span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Usually enacted when policy-makers believe the market price is unfair to buyers or sellers
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Two kinds
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price Ceiling: A legal maximum on the price at which a good can be sold
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price Floor: A legal minimum on the price at which a good can be sold

<span style="font-family: 'Lucida Console',Monaco,monospace;">Price Ceiling
<span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price ceiling higher than / equal to the equilibrium price: not binding & has no effect on the price or quantity sold
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price floor lower than the equilibrium price: binding constraint & shortage is created

<span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Possible Outcomes
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price ceiling higher than / equal to the equilibrium price: not binding & has no effect on the price or quantity sold
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price ceiling lower that the equilibrium price: binding constraint & shortage is created
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Example
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">In 1973, OPEC raised the price of crude oil, which led to a reduction in the supply of gasoline.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Rent controls are ceilings placed on the rents that landlords may charge their tenants
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Goal: help the poor by making housing more affordable

<span style="font-family: 'Lucida Console',Monaco,monospace;">

<span style="font-family: 'Lucida Console',Monaco,monospace;">Price Floor
<span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Possible Outcomes
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price floor lower than / equal to the equilibrium price: not binding & has no effect on the price or quantity sold
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price floor higher than the equilibrium price: binding constraint & surplus is created

<span style="font-family: 'Lucida Console',Monaco,monospace;"><span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Examples
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Minimum Wage: the lowest price possible for labor that any employer may pay

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=<span style="font-family: 'Lucida Console',Monaco,monospace;">TOPIC 2 = =<span style="font-family: 'Lucida Console',Monaco,monospace;"> =

<span style="font-family: 'Lucida Console',Monaco,monospace;">Taxes
<span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Governments levy taxes to raise revenue for public projects
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Impacts
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Taxes discourage market activity
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">When a good is taxed, the quantity sold is smaller
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Buyers and sellers share the tax burden
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Tax Incidence: the manner in which the burden of a tax is shared among participants in a market
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Taxes result in a change in market equilibrium
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Buyers pay more and sellers receive less

Tax on Sellers .Tax on Buyers

<span style="font-family: 'Lucida Console',Monaco,monospace;">

<span style="font-family: 'Lucida Console',Monaco,monospace;">How is the burden of the tax divided?
<span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">The burden of a tax falls more heavily on the side of the market that is LESS elastic

<span style="font-family: 'Lucida Console',Monaco,monospace;">
<span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">When a market has very elastic supply and relatively inelastic demand, and when tax is imposed on the market, the price received by sellers does not fall much, so sellers bear only a small burden. By contrast, the price paid by buyers rises substantially, indicating that buyers bear most of the burden of the tax.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">When market with relatively inelastic supply and very elastic demand is taxed, the price paid by buyers does not raise much, while the price received by sellers falls substantially. Thus, sellers bear most of the burden of the tax.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">A tax burden falls more heavily on the side of the market that is LESS ELASTIC.

<span style="font-family: 'Lucida Console',Monaco,monospace;"> =<span style="font-family: 'Lucida Console',Monaco,monospace;">Summary = <span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price controls include price ceilings and price floors.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">A price ceiling is a legal maximum on the price of a good or service. An example is rent control.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">A price floor is a legal minimum on the price of a good or a service. An example is the minimum wage.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Taxes are used to raise revenue for public purposes.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">When the government levies a tax on a good, the equilibrium quantity of the good falls.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">A tax on a good places a wedge between the price paid by buyers and the price received by sellers.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">The incidence of a tax refers to who bears the burden of a tax.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">The incidence of a tax does not depend on whether the tax is levied on buyers or sellers.
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">The incidence of the tax depends on the price elasticities of supply and demand.

=<span style="font-family: 'Lucida Console',Monaco,monospace;">Key Terms = <span style="font-family: 'Lucida Console',Monaco,monospace;">
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price Ceiling: A legal maximum on the price at which a good can be sold
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Price Floor: A legal minimum on the price at which a good can be sold
 * <span style="font-family: 'Lucida Console',Monaco,monospace;">Tax Incidence: the manner in which the burden of a tax is shared among participants in a market

<span style="font-family: 'Lucida Console',Monaco,monospace;"> =<span style="font-family: 'Lucida Console',Monaco,monospace;">Little Quiz! = =<span style="font-family: 'Lucida Console',Monaco,monospace;"> =
 * 1) <span style="font-family: 'Lucida Console',Monaco,monospace;">Legal price at which a good can be sold is
 * 2) <span style="font-family: 'Lucida Console',Monaco,monospace;">price floor
 * 3) <span style="font-family: 'Lucida Console',Monaco,monospace;">price stabilization
 * 4) <span style="font-family: 'Lucida Console',Monaco,monospace;">price ceiling
 * 5) <span style="font-family: 'Lucida Console',Monaco,monospace;">Both 1 and 2
 * 6) <span style="font-family: 'Lucida Console',Monaco,monospace;">Both 1 and 3
 * 7) <span style="font-family: 'Lucida Console',Monaco,monospace;">A price floor is not binding if
 * 8) <span style="font-family: 'Lucida Console',Monaco,monospace;">the price floor is higher than the equilibrium market price
 * 9) <span style="font-family: 'Lucida Console',Monaco,monospace;">the price floor is lower than the equilibrium market price
 * 10) <span style="font-family: 'Lucida Console',Monaco,monospace;">people are willing to buy as much when the price floor is imposed as they did before
 * 11) <span style="font-family: 'Lucida Console',Monaco,monospace;">the government sets it
 * 12) <span style="font-family: 'Lucida Console',Monaco,monospace;">The sellers feel like it

Answer: 1-5, 2- <span style="font-family: 'Lucida Console',Monaco,monospace;">

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