Chapter+6+(JEM)-Supply,+Demand,+and+Government+Policies

=**__Price celling and Price Floor__**=

Government sometimes impose policy to control the price. Price Floor: When the price of good seems too cheap, government impose price floor to set a limit to a minimum price. When price floor is lower than equilibrium price, it is non binding. When the price floor is higher than the equilibrium price, it creates surplus. Best example can be minimum wage.

Price Floor (makes... SHORTAGE!) Price Celling: When price of good seems too expensive, government impose price celling to set a limit to maximum price. Price Ceiling (makes... SURPLUS!) When price celling is higher than equilibrium price, it is non binding. When price celling is lower than the equilibrium price, it creates shortage. Best example can be rent.



Price Ceiling and Floors : [|Easy Explanation (Price ceiling and floor)]

AWESOME VIDEO ON THE EXAMPLE OF PRICE FLOOR!! (MINIMUM WAGE) [|Minimum Wage - part 1] [|Minimum Wage - part 2]

Graph of Tax (See how both consumers and producers "share" the burden) Tax

Government imposes tax to get money for: building roads. national security hospitals and public services everything that is required to run the country.

When tax is imposed on the buyers: demand curve shifts to the left because price is higher. this means that quantity also drops. Price paid by consumers are higher than before. Price received by sellers are lower than before. Deadweight loss is created.

When tax is imposed on the producers: Supply curve shifts to the left. Quantity drops price paid by consumers are higher than before. Price received by producers are lower than before. Deadweight loss is created.

It does not matter who gets tax, the result are same.

How tax can be divided

When supply curve is more elastic than demand curve, the buyers pay the most of tax.

When supply curve is more inelastic than demand curve, the sellers pay most of tax.

Another one on Tax! [|Effect of Tax]

Questions: 1) Name one example of price floor. In your opinion, is this a good policy? Explain. 2) What is the general effect of government intervention on the market? 3) Who would have the most tax burden? What would change this?

Answers: 1) Minimum wage is an example of price floor. I believe that this is not a very good policy because it increases the unemployment rate. Price floor raises the price level for labor above the equilibrium where there is a larger suply of labor than the demand. 2) Government intervention creates deadweight loss. 3) Tax burden would be equally paid off by both consumers and producers. However, if one of the curves is more inelastic than the other, it will have more tax burden than the other.