Chapter+6+Supply,+Demand,+and+Government+Policies.JAKS

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




 * 


 Price ceiling: a legal maximum on the price at which a good can be sold. (not binding) Price floor: a legal minimum on the price at which a good can be sold. (binding constraint)


 

I. Introduction

 * Price controls are usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers.

II.CONTROLS OF PRICE
How Price Ceilings Affect Market Outcomes.   __Case Study 1 – Lines at the gas pump__ How shortage occurs: In a free market, a shift in supply would have raised the price of the good and no shortage would have occurred. Instead, the price ceiling prevented the price from rising o the equilibrium level. At the price ceiling producers were willing to sell Qs, and consumers were wiling to buy Qd. Thus the shift in supply causes a sever shortage at the regulate price.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Price ceiling: a legal maximum on the price at which a good can be sold. (not binding)
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Price floor: a legal minimum on the price at which a good can be sold. (binding constraint)
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">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.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Rationing mechanisms that develop under price ceilings are rarely desirable: discrimination.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Rationing mechanism in a free, competitive market is both efficient and impersonal. Free markets ration goods with prices.

__Case Study 2 - Rent Control__ The local government places a ceiling on rents that landlords may charge their tenants. The goal of this policy is to help the poor by making housing more affordable.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The short-run supply and demand for housing are relatively inelastic


 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">In the short run, landlords have a fixed number of apartments to rent, and they cannot adjust this number quickly as market conditions change. Moreover, the number of people searching for housing n a city may not be highly responsive to rents in the short run because people take time to adjust their housing arrangements. This causes shortage.


 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Both the supply and demand are more elastic in the long run.

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">On the supply side, landlords respond to low rents by not building new apartments an by failing to maintain existing ones. On the demand side, low rents encourage people to find their own apartments and induce more people to move into a city. <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> How Price Floors Affect Market Outcomes <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> __Case Study 3 – The Minimum Wage__ <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Evaluating Price Controls <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> III. TAXES <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">How Taxes on Buyers Affect Market Outcomes <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">How Taxes on Sellers Affect Market Outcomes <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">__Case Study 4 – The congress distribute the burden of a payroll tax?__ <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Elasticity and Tax Incidence <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">__Case Study 5 – Who pays the luxury tax?__
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Ways to ration housing: waiting list, preference to tenants, racial discrimination.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">With shortages an waiting lists, landlords lose their incentive. Tenant get lower rents, but also get lower-quality housing.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">When rent control is eliminated and a market for housing is regulated by the forces of competition, such laws are less necessary. In a free market, the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord behavior.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Both price floors and price ceilings are an attempt by the government to maintain prices at other than equilibrium levels.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> A binding price floor causes surplus: When market price equals price floor, the quantity supplied exceeds the quantity demanded.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Undesirable rationing mechanisms by price floors: The sellers who appeal to the personal biases of the buyers, perhaps due to racial or familiar ties, are better able to sell their goods. In a free market, the price serves as the rationing mechanism, and sellers can sell all they want at the equilibrium price.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Minimum wage laws dictate the lowest price fr labor that any employer may pay.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">If the minimum wage is above the equilibrium level, as it is here, the quantity of labor supplied exceeds the quantity demanded. The result is unemployment. Thus, the minimum wage raises the incomes of those workers who have jobs, but it lowers the incomes of workers who cannot find jobs.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The impact of the minimum wage depends on the skill and experience of the worker. Rather, it is more often binding for teenagers (equilibrium wages of teenagers are low because teenagers are among the least skilled and least experienced members. Also, willing to accept lower wage in exchange for on-the-job training). Leads to unemployment.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Alters the quantity supplied: when the minimum wage rises, teenagers choose to drop out of school and take jobs. These new dropouts displace other teenagers who had already dropped out of school and who now become unemployed.
 * When policymakers set prices by legal decree, they obscure the signals that normally guide the allocation of society’s resources.
 * Price controls are often aimed at helping the poor. However, it often hurt those. Helping the needy can be accomplished differently. An example of a wage subsidy is the earned income tax credit, a government program that supplements the incomes of low-wage workers.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Who bears the burden of the tax?
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Tax incidence: the manner in which the burden of a tax is shared among participants in a market.
 * 1) <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Tax shifts the demand curve – sellers are not affected, only buyers are
 * 2) <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Buyers demand curve shifts to the left (or equivalently, downward) – less quantity demanded
 * 3) <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Sellers sell less and buyers buy less in the new equilibrium, the tax reduces the size of the market.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Buyers and sellers share the burden of taxes. In the new equilibrium, buyers pay more for the good, and sellers receive less.
 * 1) <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> The tax on sellers makes the business less profitable at any given price, so it shifts the supply curve.
 * 2) <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Sellers supply curve shifts to the left (or equivalently, upward)
 * 3) <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Sellers receive a higher price than they did without the tax, but the effective price (after paying the tax) falls.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Taxes on buyers and sellers are equivalent.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> The only difference between taxes on buyers and taxes on sellers is who sends the money to the government.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Payroll tax: a tax on the wages that firms pay their workers. Pays for Social Security, Medicare, income support and healthcare programs for elderly
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> It places a wedge between the wage that workers receive and the wage that firms pay.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Lawmakers can decide whether a tax comes from the buyer’s pocket or from the seller’s, but they cannot legislate the true burden of a tax. Rather, tax incidence depends on the forces of supply and demand.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Elastic supply, inelastic demand: when a tax is imposed on a market with these elasticities, 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="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Inelastic supply, elastic demand: the price paid by buyers does not rise much, but the price received by sellers falls substantially. Thus, sellers bear most of the burden of the tax.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A tax burden falls more heavily on the side of the market that is less elastic.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Most labor economists say: supply of labor is much less elastic than the demand.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Taxing luxury goods would be able to tax the rich.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> However, the demand for luxury items are elastic. Therefore, different outcome. A loss for the suppliers, who are inelastic in the short run.

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**<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Review Questions **
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> In a free market, who determines how much of a good will be sold and the price at which it is sold? <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> a market is a <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> buyers and sellers who have no influence on market price are referred to as <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> Each of the following are determinants of demand except <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> The positive relationship between price and quantity supplied is called <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> The price where quantity supplied equals quantity demanded is called <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> Answers6.jaks
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">suppliers
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">demanders
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">the government
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">suppliers and demanders together
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">group of demanders and suppliers of a particular good or service
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">group of people with common desires
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">place where only sellers meet
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">place where only buyers come together
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">price makers
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">market pawns
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">price takers
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">powerless
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">tastes
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">technology
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">income
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">price of related goods
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">a market
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">a change in supply
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">the demand curve
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">the law of supply
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">coordinating price
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">monopoly price
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">equilibrium price
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">all of the above.

**<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Work Cited **
image: http://www.chiefingredient.com/blog/wp-content/supply-demand.jpg video: http://www.youtube.com/watch?v=kuD5QPBcMVM questions: mr.ski