*Step+6.+Supply,+Demand,+and+Government+Policies+-Lauren

=Supply, Demand, and Government Politics = 



__**Brief Introduction**__ You're now officially 30% closer to conquering Micro-economics! Hold on tight!

__**Key Terms**__ Price Ceiling- legal maximum on the price at which a good can be sold Price Floor- legal minimum on the price at which a good can be sold. Taxes: Money collected by the government to raise revenue for public projects. However, by having tax, dead weight loss is created. Tax incidence: how the tax is divided between both the consumers and the producers.  __**What We Will Learn**__ It is important that you know that the economy is controlled by the laws of supply and demand. Price controls and taxes are common in markets. Concentrate on price ceilings, price floors, and the impact of tax on both sides of suppliers and producers.

__**Introduction**__ A free, unregulated market could reach equilibrium by itself, but even a equilibrium does not mean that both sides are satisfied. Control on prices are usually regulated when policymakers, who make the rules, think the market is unfair to either the buyers or the sellers. This results in the government creating price ceilings or price floors. It is important that you know the differences of binding and not binding price ceilings and floors.

 __**Topics**__ Price Ceiling: legal MAXIMUM on prices ex. persay that the most expensive anyone can sell a bottle of water is 10$ Price Floor: legal MINIMUM on prices ex. persay that the lowest hourly income of workers is 4$ media type="custom" key="5208167"
 * 1. Price Ceiling vs. Price Floor**
 * you could already quite see how these could help satisfy both sides right?

It's easy to determine!

Both Price ceiling and floors could be binding or not binding. -price ceiling is not binding if it's set ABOVE the equilibrium price -price ceiling is binding if it's set BELOW the equilibrium price. +we call it that it's binding because it's affecting the equilibrium price These would be binding price ceilings and price floors. If the price ceiling is a "ceiling" (higher than the equilibrium price), it's a normal "ceiling" so it's not binding. Same applies with the floor. But if they are opposite, perhaps the floor is higher than the equilibrium, than they are binding.**
 * 2. Binding vs. Not Binding**
 * Just simply think this way:

Binding Price Ceiling... - causes shortages because quantity demanded is greater than quantity supplied -causes nonprice rationing
 * 3. Effect of Price Ceilings vs. Effect of Price Floors**

Binding Price Floor... -causes surplus because quantity supplied is greater than quantity demanded -causes nonprice rationing a great example is a minimum wage law!

-sometimes, government raise taxes to get revenue for the government and its projects. Major facts: -BOTH the suppliers and the buyers share the burden of the tax (tax incidence!) -it's just that the burden is much heavier on the side of the market that is less elastic. -when taxes are levied, the equilibrium quantity FALLS - tax places a wedge between the price paid by buyers and price received by the sellers. buyers pay more and sellers receive less whenever tax is levied. It therefore produces some deadweight loss. media type="custom" key="5208689"
 * 4. Taxes**

  __Conclusion__
 * So now you know how the government sometimes control the market with price ceilings, price floors, and tax! Elasticity affects the burden of the tax on each sides. Both the supply and demand play a major role in the market!**

__Quiz 1. On which side does tax burden fall heavier on? a. elastic side b. less elastic side c. buyers d. sellers

2. A price floor is binding if it's__ __{answer} than the equilibrium price

A: b, higher__ __**__

Sources: 1. http://livingeconomics.org/glossary.asp 2. http://www.answers.com/topic/tax-wedge