CHAPTER+6-+ELASTICITY+AND+ITS+APPLICATION.JJJSS

=**Chapter 6**: __Supply, Demand, and Government Polici__  __es__ =

 This chapter will be your first look at policies. We will analyze various types of **government policies** only using supply and demand to see what effects they have in the market. You will be surprised by some of the results!  In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities.  One of the things government can do is to set **price controls** when the market price is seen a s unfair to either buyers or sellers.  //Government Policies discussed in this chapte// r -price controls (price ceiling and price floor) -tax

 **In a free, unregulated market system,****market forces establish equilibrium prices****and exchange quantities.**   <span style="font-size: 8px; font-family: Times; color: rgb(239, 145, 0)">   <span style="color: rgb(110, 0, 67)"> <span style="font-size: 12px; font-family: Times; color: rgb(110, 0, 67)">**One of the things** government **can do is to****set price controls when the market price is****seen as unfair to either buyers or sellers.**

<span style="font-family: Georgia,serif; color: rgb(34, 72, 221)">CONTROLS ON PRICE
<span style="font-family: Georgia,serif">**P****rice ceiling:** a legal maximum on the price at which a good can be sold ex.) rent control for apartments in NYC <span style="font-family: Georgia,serif">ex.) minimum wage
 * Price floor:** a legal minimum on the price at which a good can be sold

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<span style="font-family: Georgia,serif">If the price ceiling is above the equilibrium, the price ceiling is<span style="font-family: Georgia,serif; color: rgb(37, 212, 51)"> **not binding**. <span style="font-family: Georgia,serif; color: rgb(37, 212, 51)"><span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif"> The forces of the mark <span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif">et move supply and demand to the equilibrium, and the price ceiling has no effect on the price or quantity. <span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif">

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If the price ceiling is above the equilibrium, the price ceiling is<span style="font-family: Georgia,serif; color: rgb(77, 214, 61)"> **binding** **constraint.** A binding price creates ... ......//shortages because Quantity demanded > Quantity Supplied// - forces of supply and demand want to move the price to the equilibrium but when it hits the price ceiling, it can't increase anymore. - at this price the quantity of the product demanded exceeds the supply creating a <span style="font-family: Georgia,serif; color: rgb(86, 235, 51)">**shortage** in the good.

......//nonprice rationing// - since there is a shortage, a mechanism for rationing the good will develop - it could be<span style="font-family: Georgia,serif; color: rgb(64, 224, 56)"> **long** **lines** or sellers could <span style="font-family: Georgia,serif; color: rgb(46, 204, 47)">**ration** the good

Rationing mechanisms that develop due to price ceilings are rarely desirable. <span style="font-family: Georgia,serif"> =<span style="font-family: Georgia,serif">Example: <span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif"> = =<span style="font-family: Georgia,serif"> = <span style="font-family: Georgia,serif">

<span style="font-family: Georgia,serif"> ===<span style="font-family: Georgia,serif; color: rgb(18, 22, 171)"><span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif">PRICE FLOORS ===

<span style="font-family: Georgia,serif">If the price floor is below the equilibrium, than the price floor is <span style="font-family: Georgia,serif; color: rgb(60, 228, 58)">**non-binding.** The forces of the market move supply and demand to the equilibrium and the price floor has //no effect// on the price or quantity. <span style="font-family: Georgia,serif">

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If the price floor is above the equilibrium, the price ceiling is a <span style="color: rgb(78, 220, 76)">**binding constraint**. A binding constraint creates...

//....a surplus because quantity supplied > quantity demanded// -forecs of supply and demand want to move the price to the equilibrium, but when it hits the price floor it can't decrease anymore. -at this new price, the quantity supplied is greater than the quantity demanded creating a <span style="color: rgb(34, 211, 49)">**surplus**.

//...non price rationing// -rationing the good using discrimination criteria.

<span style="font-family: Georgia,serif"> =<span style="font-family: Georgia,serif">Example: Minimum Wage = =<span style="font-family: Georgia,serif"> = <span style="font-family: Georgia,serif">media type="youtube" key="UxwxQ2AJTOg" width="425" height="350"

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<span style="font-family: Georgia,serif">When the government imposes a price ceiling in a market, a shortage of the good arises and sellers must ration the scare goods among the large number of potential buyers.

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<span style="font-family: Georgia,serif">When the government imposes a price floor on the market, a surplus of the good arises and some sellers are unable to sell all they want at the market price. Those who appeal to personal biases are better able to sell their goods.

<span style="font-family: Georgia,serif; color: rgb(0, 28, 255)">OVERALL OUTCOME:
<span style="font-family: Georgia,serif">Prices have the crucial job of determining how much of a product is sold at what price. When policymakers set the legal decree, the factors that normally guide the allocation of the society's resources is obscured. Although they are made with good intentions, price controls often hurt those they are trying to help. media type="youtube" key="U6O5XdGipD4" height="344" width="425"

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=<span style="font-family: Georgia,serif; color: rgb(19, 21, 236)"><span style="font-family: Georgia,serif"> TAX??? = =<span style="font-family: Georgia,serif"> = <span style="font-family: Georgia,serif"> Who are you supposed to tax the buyers or the sellers? If you tax the sellers, are only sellers affected? If you tax the buyers, are only buyers affected? How is the burden of the tax shared? How do you determine who gets the bigger burden of the tax?

If these are the questions that you are worrying about, then no need. This next section will tell you all about it!

<span style="color: rgb(61, 227, 43)"> <span style="font-family: Georgia,serif"><span style="color: rgb(61, 227, 43)">__**tax incidence:**__ the manner in which the burden of a tax is shared among participants in a market.

<span style="font-family: Georgia,serif; color: rgb(18, 32, 196)">HOW TAXES ON BUYERS AFFECT MARKET OUTCOMES
<span style="font-family: Georgia,serif">//FOLLOW THESE STEPS:// 1. Decide whether the law affects the supply curve or the demand curve 2. Decide which way the curve shifts 3. Examine how the shift effects equilibrium. > <span style="font-family: Georgia,serif">
 * <span style="font-family: Georgia,serif">Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium.
 * <span style="font-family: Georgia,serif"><span style="font-family: Georgia,serif; color: rgb(67, 220, 65)">**Buyers and sellers share the burden of the taxes.** In the new equilibrium, buyers pay more for the good and sellers receive less.

<span style="font-family: Georgia,serif; color: rgb(18, 32, 196)">HOW TAXES ON SELLERS AFFECT MARKET OUTCOMES
<span style="font-family: Georgia,serif">**AGAIN** //FOLLOW THESE STEPS:// 1. Decide whether the law affects the supply curve or the demand curve 2. Decide which way the curve shifts 3. Examine how the shift effects equilibrium. >
 * <span style="font-family: Georgia,serif">Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium.
 * <span style="font-family: Georgia,serif">**<span style="font-family: Georgia,serif; color: rgb(38, 194, 36)">Buyers and sellers share the burden of the taxes .** In the new equilibrium, buyers pay more for the good and sellers receive less.

<span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif; color: rgb(36, 38, 224)"> <span style="font-family: Georgia,serif"> __**<span style="font-family: Georgia,serif">THIS GRAPH SHOWS HOW TAX AFFECTS THE MARKET **__ <span style="font-family: Georgia,serif; color: rgb(90, 228, 58)"><span style="font-family: Georgia,serif; color: rgb(8, 7, 7)"><span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif; color: rgb(7, 3, 3)"><span style="font-family: Georgia,serif; color: rgb(60, 246, 63)">Pc = price buyers pay P = price without tax Ps = price sellers recieve a = equilibrium with tax c = equilibrium without tax

//**ONCE AGAIN, buyers and sellers share the burden of tax.**// The wedge between the buyers price and the sellers price is the same, regardless of whether the tax is levied on the buyers or sellers.


 * The only difference is....who sends the money to the government!**

==<span style="font-family: Georgia,serif; color: rgb(49, 38, 217)"><span style="font-family: Georgia,serif">**How exactly is the tax burden divided?** <span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif"> <span style="font-family: Georgia,serif"> ==

=<span style="font-family: Georgia,serif"> = //The difference between the two graphs is the elasticity.//
 * <span style="font-family: Georgia,serif; color: rgb(48, 174, 25)"><span style="font-family: Georgia,serif; color: rgb(9, 7, 7)">IT IS RARE THAT THE BURDEN IS SHARED EQUALLY!

**<span style="font-family: Georgia,serif">**FIRST GRAPH** - the price received by sellers falls only slightly, while the price paid by buyers increases substantially. - buyers bear most of the burden of tax
 * -** Inelastic demand, elastic supply

- elastic demand, inelastic supply - the price received by sellers falls substantially, while the price paid by buyers rises only slightly. -sellers bear most of the burden of tax
 * SECOND GRAPH**

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 * From this you can conclude that the tax burden falls more heavily on the side of the market that is less elastic.

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<span style="font-family: Georgia,serif">http://en.wikipedia.org/wiki/Image:Binding-price-ceiling.svg http://en.wikipedia.org/wiki/Image:Non-binding-price-ceiling.svg http://209.85.175.104/search?q=cache:PWWJ7odTmFsJ:windward.hawaii.edu/facstaff/briggs-p/Microeconomics/Chap_06.pdf+supply,+demand+and+government+policies&hl=en&ct=clnk&cd=1 http://www.rottenacorn.com/images/cartoonbig.jpg http://en.wikipedia.org/wiki/Price_floor http://www.youtube.com/watch?v=U6O5XdGipD4 http://content.answers.com/main/content/wp/en/thumb/f/f1/320px-Tax_wedge.png http://images.google.com/imgres?imgurl=http://www.culturaleconomics.atfreeweb.com/111%2520114%2520MBB%2520Macro%2520Graphics/Micro/Fig%25205.6%2520SE%2520Tax.jpg&imgrefurl=http://members.shaw.ca/elementaleconomics/mic_4_3.htm&h=339&w=691&sz=64&hl=en&start=10&sig2=S-vZmvjpSYL5INi2Ertv1w&um=1&usg=__wiczrcblyirzSPOWfx7LsDEqW_0=&tbnid=cnAu1mt8Cjk84M:&tbnh=68&tbnw=139&ei=GdgJSciHJoim6wPOvvz3AQ&prev=/images%3Fq%3Delasticity%2Btax%26um%3D1%26hl%3Den%26sa%3DG