Chapter+6+SUPPLY+DEMAND,+AND+GOVERNMENT+POLICIES+KELJ

=__CONTROLS ON PRICES__ = 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. GRAPH: Price ceiling GRAPH: Price floor

__Why do we set such controls on prices?__
In a free market, market forces (Government) establish an equilibrium price and exchange quantities. Government can interfere in free market when price is unfair to the sellers or to the buyers. Because buyers of any good wants to buy that good in lowest price as possible, and sellers of any good wants to sell a good in highest price as possible. Obviously, **//buyers and sellers' interest conflicts.//** To make the market fair, government set a price ceiling so that the sellers don't sell goods in an unfair cost, and for buyers, government set a price floor so that sellers can benefit by selling goods.

__How Price Ceilings Affect Market Outcomes.__
__**TWO**__ outcomes are possible when government set a price ceiling.
 * 1) Price ceiling is NOT binding if it is set above the equilibrium price.
 * 2) Price ceiling that IS binding when it is set below the equilibrium price. (WHICH WILL LEAD TO A SHORTAGE
 * Price ceilings are not able to go above the floor.

Binding price ceiling Qd>Qs: excess demand-> shortage

 NON Binding price ceiling.

__**HOW PRICE FLOORS AFFECT MARKET OUTCOMES.**__
__** TWO **__ outcomes are possible when the government imposes a price floor.
 * 1) The Price floor is NOT binding if set below the equilibrium price.
 * 2) The Price floor IS binding if set above the equilibrium price. (Which leads to a SURPLUS)
 * Price floors can't go below the floor!

NON-BINDING PRICE FLOOR http://upload.wikimedia.org/wikipedia/en/a/aa/Ineffective_Price_Floor.svg BINDING PRICE FLOOR http://en.wikipedia.org/wiki/Image:Surplus_from_Price_Floor.svg Qs>Qd:Excess supply->surplus A binding price floor causes a surplus because Qs>Qd.

__Video about Price ceiling and Price floor.__
media type="youtube" key="U6O5XdGipD4&hl=en&fs=1" height="344" width="425"

=__TAXES:   __= = <span style="font-family: 'Lucida Console',Monaco,monospace; font-size: 50%">//*tax incidence:// the manner in which the burden of tax is shared among participants in a market  <span style="font-size: 210%; font-family: Impact,Charcoal,sans-serif; color: rgb(233, 37, 57)"> =

__<span style="font-size: 120%; font-family: 'Lucida Sans Unicode','Lucida Grande',sans-serif; color: rgb(203, 0, 255)">This is a basic graph with tax imposed on a free market. __ <span style="font-family: Verdana,Geneva,sans-serif; color: rgb(153, 0, 255)"> Pc -> Price buyers pay P* -> Price without tax Ps -> Price sellers receive b -> Equilibrium with tax c -> Equilibrium without tax

=__<span style="background-color: rgb(233, 208, 165); color: rgb(69, 39, 39)"><span style="font-family: Verdana,Geneva,sans-serif; color: rgb(153, 0, 255)">**How Taxes on Buyers Affect Market Outcomes** __= <span style="font-family: Verdana,Geneva,sans-serif; color: rgb(153, 0, 255)"> __**<span style="font-size: 120%; font-family: Georgia,serif">FOLLOW THESE STEPS **__ <span style="font-family: Georgia,serif">1. We decide whether the law effects the supply curve or demand curve. 2. We decide which way the curve shifts. 3. We examine how the shift affects the equilibrium.


 * Tax discourages market activity. When a goo is taxed, the quantity of the good sold is smaller in the new equilibrium.
 * Buyers and sellers share the burden of taxes. In the new equilibrium, buyers pay more, and sellers receive more for the good.

=<span style="font-size: 120%; font-family: 'Lucida Sans Unicode','Lucida Grande',sans-serif; color: rgb(202, 100, 2)">__How Taxes on Sellers Affect Market Outcomes__ = <span style="font-family: Verdana,Geneva,sans-serif; color: rgb(153, 0, 255)">__**<span style="font-size: 120%; font-family: Georgia,serif">Again, FOLLOW THESE STEPS **__ <span style="font-family: Georgia,serif">1. We decide whether the law effects the supply curve or demand curve. 2. We decide which way the curve shifts. 3. We examine how the shift affects the equilibrium. <span style="font-family: 'Comic Sans MS',cursive; color: rgb(0, 31, 255); font-size: 130%"> =<span style="font-family: 'Comic Sans MS',cursive; color: rgb(0, 31, 255); font-size: 130%">__How the Burden of Tax is divided__ = =<span style="font-family: 'Comic Sans MS',cursive; color: rgb(0, 31, 255); font-size: 130%"> = <span style="font-family: 'Comic Sans MS',cursive; color: rgb(0, 31, 255); font-size: 130%">

<span style="font-family: 'Lucida Console',Monaco,monospace; color: rgb(232, 2, 2)">__**First picture:**__

 * <span style="font-family: Georgia,serif">Elastic Supply and Inelastic demand.
 * <span style="font-family: Georgia,serif">The price received by sellers falls only slightly while the price paid by buyers rises substantially.
 * <span style="font-family: Georgia,serif">Therefore buyers bear most of the burden of the tax. (BLUE rectangle (tax on buyers) >Red rectangle (tax on suppliers))

__**<span style="font-family: 'Lucida Console',Monaco,monospace; color: rgb(5, 11, 204)">Second picture: **__

 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif">Inelastic Supply and Elastic Demand.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif">Price received by sellers falls substantially while the price paid by buyers rises only slightly.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif">Sellers bear most of the burden of the tax. (RED rectangle (tax on suppliers)>BLUE rectangle (tax on buyers))

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 110%">**1Q:** Which causes shortage of a good? price floor or price ceiling
 * 2Q:** States some reasons why government set price ceiling and floor.
 * 3Q**: How does tax effect price received by sellers and price paid by buyers.

1A: Price ceiling 2A: Minimum wage. UNFAIR trading 3A: Price paid by buyers goes up, and Price received by sellers goes down.