Chapter+Six

=Supply, Demand, and Government Policies =

Chapter 6, offers the first look at policy by analyzing various types of government policy using only Supply and Demand. Starting off with policies that directly control prices which are usually enacted when policymakers believe that the market price of a good or service is unfair to both sellers and buyers. Next consideration is the impact of taxes. Taxes are used to influence market outcomes and to raise revenue for public purposes.

Control On Prices
* Price ceiling - Price ceiling attempts to keep prices from rising to its equilibrium level. Price ceiling can cause shortages, and black markets often develop in response to the shortage. Ex) Rent control.

source: http://images.google.co.kr/imgres?imgurl=http://www.econweb.com/MacroWelcome/sandd/Price_Ceiling.gif&imgrefurl=http://www.econweb.com/MacroWelcome/sandd/notes.html&usg

- Price floor attempts to keep market prices from declining below a certain level. Price floor cause surpluse that must be absorbed to prevent the price from falling. Ex) Agricultural support prices and minimum wages.

source: http://images.google.co.kr/imgres?imgurl=http://www.econweb.com/MacroWelcome/sandd/Price_Ceiling.gif&imgrefurl=http://www.econweb.com/MacroWelcome/sandd/notes.html&usg

// How Price Ceilings affect Market Outcomes //

Two outcomes are possible when the government imposes a price ceiling:
 * The price ceiling is not bonding if set above the equilibrium price
 * The price ceiling is binding if self below the equilibrium price, leading to a shortage

If the equilibrium price of DVD is a $7 and the government imposes a price ceiling of $5, then supply and demand would move the price up to $7. However, since the price is restricted by the price ceiling, the quantity demand go beyond the quantity supply. Which eventually cause a shortage of DVD.

// How Price Floor Affect Market Outcomes //

Two outcomes are possible when the government imposes a price floor
 * The price floor is not binding if set below the equilibrium price
 * The price floor is binding if set above the equilibrium price, leading to a surplus

If the equilibrium of rice is $3 per bushel and the government imposes a floor price of $6 per bushel, which will motivate farmers to harvest more rice. Then the quantity supply go beyond they quantity demand. Which eventually cause surplus of rice.

__Media__
media type="youtube" key="U6O5XdGipD4" height="344" width="425"

=Taxes = = * Tax  = - Amount of money you have to pay to the government so that it can pay for public services. Ta incidence;
 * 1) BOTH BUYERS AND SELLERS SHARE THE TAX BURDEN

right, source: http://images.google.co.kr/imgres?imgurl=http://www.nicholsoncartoons.com.au/cartoons/new/2003-09-24%2520Tax%2520man%2520should%2520be%2520more%2520efficient%2520350wb. left source // : // www.indremcs.org/ Portals/0/Tax%20Pix.jpg // How Taxes on Buyers Affect Market Outcomes //

For buyers, tax creates incentive to buy less which shits demand curve to the left side. * Demand curve is shifted by exactly the size of tax. However, supply demand has no changes since sellers are not affected by this tax. (TAX=FALL OF EQUILIBRIUM PRICE=BUYERS BUY LESS=SELLERS SELL LESS) = REDUCE SIZE OF MARKET.

source: welkerswikinomics.com/ blog/wp-content/uploads... This graph shows how shift in demand curve raises both quantity produced and price.

// How Taxes On Sellers Affect Market Outcomes //

For sellers, tax raises the price of selling and motivate sellers to produce less which shits supply curve to the left. * Supply curve is shifted by the size of tax. Quantity demand is not affected so it remains the same. (TAX=RISE OF EQUILIBRIUM PRICE=FALL OF EQUILIBRIUM QUANTITY) =REDUCE SIZE OF MARKET

source: welkerswikinomics.com/ blog/wp-content/uploads This graph //s//hows how shift in supply curve raises the price, but lowers the quantity produced // Elasticity and Tax incidence //


 * The incidence of tax depends of the price elasticities of supply and demand.
 * The burden of tax falls more heavily on the market that is less elastic.

Source: tutor2u.net/economics/ content/diagrams/labour...

__Summary__
- price ceiling is maximum price for a good and rent control is an example. If the price ceiling is below the equilibrium price, the quantity demanded exceeds the quantity supplied. There is a shortage - price floor is minimum price and example of it is minimum wage. If the price floor is above the equilibrium price, the quantity supplied exceeds the quantity demanded. There is surplus - It is not good to tax because there is deadweight loss and the equilibrium quantity of the good falls - tax places a wedge between the price paid by buyers and price received by sellers. Buyers pay more and sellers receive less. - the incidence of tax depends on the price elasticity of supply and demand.

__Vocabulary__
price ceiling: maximum on the price at which a good can be sold price floor: minimum on the price at which a good can be sold Tax incidence: the manner in which a burden a tax is shared among participants in a market


1. Fill in the blanks a. Price ceiling is an example of _ and causes b. Price floor is an example of _ and causes _

2. What does price elasticities of demand determine? <span style="font-size: 120%; font-family: 'Comic Sans MS',cursive;"> __answers__ 1. a) Price ceiling is an example of rent control_ __and causes__ shortage b)   <span style="font-size: 120%; font-family: 'Comic Sans MS',cursive;">Price floor is an example of ___minimum wage__ and causes __surplus__

2. Price elasticities of demand and supply determine who bears the greater burden of tax