1. Sport Economics & Finance
April 8, 2015

2. Today
Rent
Taxes
Minimum wage

3. Rent Economic definition Finance definition
When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.
Finance definition

4. Rent Seeking Behavior Transfer of wealth Nothing additional is created
Ex. a franchisor wants to make more money
Vs.

5. Rent Seeking Behavior Good or Bad?
constructed and carried out by those in power
must have the resources to carry out and enforce such behavior.
classes such as the hegemonic masculinity benefit from rent seeking behavior
this class is of the minority then this behavior can in no way be for the good of the majority

6. Government Policies That Alter the Private Market Outcome
Price Controls
Price Ceiling: a legal maximum on the price of a good or service. Example: rent control.
Price Floor: a legal minimum on the price of a good or service. Example: minimum wage.
Taxes
The Government can make buyers or sellers pay a specific amount on each unit bought/sold. 6

7. Price Floors
When the government imposes a price floor, two outcomes are possible.
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. 12 15

8. A Price Floor That Is Not Binding...
Price of
Shave-Ice
Cone
Supply
Equilibrium
price $3
Price
floor 2
Demand
100
Quantity of
Shave-Ice
Cones
Equilibrium
quantity 8 17

9. A Price Floor That Is Binding...
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
A Price Floor That Is Binding...
Price of
#2 Wheat
Supply
Surplus $4
Price floor 80
Quantity
demanded
120
Quantity
supplied $3
Equilibrium
price
Demand
Quantity of
#2 Wheat 8 17

10. Effects of a Price Floor
A price floor prevents supply and demand from moving toward the equilibrium price and quantity.
When the market price hits the floor, it can fall no further, and the market price equals the floor price. 15 24

11. The Market for ApartmentsQ
Rental price of apartments S D
$800
300
Equilibrium without price controls
Quantity of apartments 11

12. How Price Ceilings Affect Market OutcomesQ S
Price Ceiling
$1000 D
A price ceiling above the equilibrium price is not binding – has no effect on the market outcome.
$800
300 12

13. How Price Ceilings Affect Market OutcomesQ
The equilibrium price ($800) is above the ceiling and therefore illegal.
The ceiling is a binding constraint on the price, causes a shortage. S D
$800
Price Ceiling
$500
250
400
Shortage 13

14. The Minimum Wage
An important example of a price floor is the minimum wage. Minimum wage laws dictate the lowest price possible for labor that any employer may pay.

15. The Minimum Wage A Free Labor Market Labor supply Labor demand Wage
Equilibrium
wage
Equilibrium
employment
Labor
demand
Quantity of
Labor

16. The Minimum Wage A Labor Market with a Minimum Wage Labor supply
Labor surplus
(unemployment)
Minimum
wage
Quantity
demanded
Quantity
supplied
Labor
demand
Quantity of
Labor

17. Effects of Minimum Wage
Less likelihood of health insurance
Less training
More discrimination in hiring

18. Taxes
The Government levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc.
The Government can make buyers or sellers pay the tax.
The tax can be a % of a good’s price, or a specific amount for each unit sold. 18

19. Effects of a $1.50 per unit tax on buyers
A Tax on Buyers
A tax on buyers shifts the D curve down by the amount of the tax.
Effects of a $1.50 per unit tax on buyers P Q D1 S1
$11.00
PB = D2
Tax
430
$10.00
500
The price buyers pay rises, the price sellers receive falls, equilibrium Q falls.
$9.50
PS = 19

20. Effects of a $1.50 per unit tax on sellers
A Tax on Sellers
Effects of a $1.50 per unit tax on sellers
A tax on sellers shifts the S curve up by the amount of the tax. P Q S2 D1 S1
$11.00
PB =
Tax
430
$10.00
500
$9.50
PS =
The price buyers pay rises, the price sellers receive falls, equilibrium Q falls. 20

21. The Outcome Is the Same in Both Cases!
The effects on P and Q, and the tax incidence are the same whether the tax is imposed on buyers or sellers! P Q
What matters is this:
A tax drives a wedge between the price buyers pay and the price sellers receive. D1 S1
PB =
$11.00
Tax
$10.00
500
PS =
$9.50
430 21

22. SUMMARY
A price ceiling is a legal maximum on the price of a good. An example is rent control. If the price ceiling is below the equilibrium price, it is binding and causes a shortage.
A price floor is a legal minimum on the price of a good. An example is the minimum wage. If the price floor is above the equilibrium price, it is binding and causes a surplus. The labor surplus caused by the minimum wage is unemployment. 22