Download presentation
Presentation is loading. Please wait.
1
Supply, Demand, and Government Policies
2
Controls on Prices Price ceiling Price floor
A legal maximum on the price at which a good can be sold Price floor A legal minimum on the price at which a good can be sold
3
Controls on Prices How price ceilings affect market outcomes
Not binding Above the equilibrium price No effect on the price or quantity sold Binding constraint Below the equilibrium price Shortage Sellers must ration the scarce goods The rationing mechanisms – not desirable
4
A Market with a Price Ceiling
(a) A Price Ceiling That Is Not Binding (b) A Price Ceiling That Is Binding Price of Ice-Cream Cones Price of Ice-Cream Cones Supply Supply Demand Demand $4 Price ceiling Equilibrium price 3 $3 Equilibrium price 100 2 Price ceiling 75 125 Shortage Equilibrium quantity Quantity supplied Quantity demanded Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
5
Rent Control in the Short Run and in the Long Run
(a) Rent Control in the Short Run (supply and demand are inelastic) (b) Rent Control in the Long Run (supply and demand are elastic) Rental Price of Apartment Rental Price of Apartment Supply Demand Supply Demand Controlled rent Controlled rent Shortage Shortage Quantity of Apartments Quantity of Apartments
6
Controls on Prices How price floors affect market outcomes Not binding
Below the equilibrium price No effect on the market Binding constraint Above the equilibrium price Surplus Some sellers are unable to sell what they want The rationing mechanisms – not desirable
7
A Market with a Price Floor
(A) A Price Floor That Is Not Binding (B) A Price Floor That Is Binding Price of Ice-Cream Cone Price of Ice-Cream Cone Supply Surplus Supply Demand Demand $4 Price floor 80 120 $3 3 Equilibrium price 100 Equilibrium price 2 Price floor Equilibrium quantity Quantity demanded Quantity supplied Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
8
Price floor: minimum wage
The minimum wage Price floor: minimum wage Lowest price for labor that any employer may pay Fair Labor Standards Act of 1938 Ensure workers a minimally adequate standard of living 2009: federal minimum wage = $7.25 per hour Some states mandate minimum wages above the federal level
9
How the Minimum Wage Affects the Labor Market
(b) A Labor Market with a Binding Minimum Wage (a) A Free Labor Market Wage Wage Labor supply Labor supply Labor surplus (unemployment) Labor demand Labor demand Minimum wage Quantity demanded Quantity supplied Equilibrium wage Equilibrium employment Quantity of Labor Quantity of Labor
10
Taxes Government use taxes Tax incidence
To raise revenue for public projects Tax incidence Manner in which the burden of a tax is shared among participants in a market
11
Taxes Tax levied on sellers of a good
Immediate impact on sellers - shift in supply Supply curve shifts left Higher equilibrium price Lower equilibrium quantity The tax – reduces the size of the market
12
A Tax on Sellers Price of A tax on sellers Ice-Cream shifts the supply
Cone A tax on sellers shifts the supply curve upward by the size of the tax ($0.50). Demand, D1 Equilibrium with tax Price buyers pay S2 S1 $3.30 Price without tax Tax ($0.50) 90 3.00 Equilibrium without tax 100 2.80 Price sellers receive Quantity of Ice-Cream Cones
13
Taxes Tax levied on sellers of a good Taxes discourage market activity
Buyers and sellers share the burden of tax Buyers pay more Worse off Sellers receive less Get the higher price but pay the tax Overall: effective price fall
14
Taxes Tax levied on buyers of a good Initial impact on the demand
Demand curve shifts left Lower equilibrium price Lower equilibrium quantity The tax – reduces the size of the market
15
A Tax on Buyers Price of Ice-Cream Equilibrium with tax Cone
D1 Price buyers pay Equilibrium without tax Supply, S1 D2 A tax on buyers shifts the demand curve downward by the size of the tax ($0.50). $3.30 Price without tax Tax ($0.50) 90 3.00 100 2.80 Price sellers receive Quantity of Ice-Cream Cones
16
Taxes Tax levied on buyers of a good
Buyers and sellers share the burden of tax Sellers get a lower price Worse off Buyers pay a lower market price Effective price (with tax) rises
17
Taxes Taxes levied on sellers and taxes levied on buyers are equivalent Wedge between the price that buyers pay and the price that sellers receive The same, regardless of whether the tax is levied on buyers or sellers Shifts the relative position of the supply and demand curves Buyers and sellers share the tax burden
18
Taxes Elasticity and tax incidence
Very elastic supply and relatively inelastic demand Sellers – small burden of tax Buyers – most of the burden Relatively inelastic supply and very elastic demand Sellers – most of the tax burden Buyers – small burden
19
(a) Elastic Supply, Inelastic Demand
How the Burden of a Tax Is Divided (a) (a) Elastic Supply, Inelastic Demand Price 1. When supply is more elastic than demand . . . Demand Supply Price buyers pay Tax The incidence of the tax falls more heavily on consumers . . . Price without tax Price sellers receive Than on producers. Quantity
20
How the Burden of a Tax Is Divided (b)
(b) Inelastic Supply, Elastic Demand Price 1. When demand is more elastic than supply . . . Demand Supply Price buyers pay Tax 3. Than on consumers Price without tax The incidence of the tax falls more heavily on producers. Price sellers receive Quantity
21
Taxes Tax burden Falls more heavily on the side of the market that is less elastic Small elasticity of demand Buyers do not have good alternatives to consuming this good Small elasticity of supply Sellers do not have good alternatives to producing this good
Similar presentations
