Econ Chapter 6 Notes - Summary Principles of Economics PDF

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Econ 1 Chapter 6—Supply, Demand, and Government Policies Intro  

Analyze types of government policy using supply and demand Government is lobbied to pass laws that alter the market outcome by controlling the price

Control on Prices 

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How Price Ceilings Affect Market Outcomes o Price ceiling—a legal maximum on the price at which a good can be sold o Binding—below equilibrium—market can’t reach equilibrium  QD exceeds QS causing a shortage  In response to shortage, either long lines and time lost or sold on personal biases o Nonbinding—above equilibrium—the price that balances supply and demand is below the ceiling o When the government imposes a binding price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers  Rationing mechanisms—long inefficient lines that waste buyers’ time. discrimination according to the sellers bias is unfair o Ex. Lines at the Gas Pump  When the supply was lessened, the curve shifted left so the equilibrium rose. The price ceiling was below equilibrium so caused a shortage o Ex. Rent Control in the Short Run and the Long Run  Short-run in inelastic  Long run—buyers and sellers respond more to market conditions  Sellers—build less and don’t maintain existing apartments  Demand—cheaper so people move out on their own and into cities  Tenets get lower rents, but they get lower-quality housing How Price Floors Affect Market Outcomes o Price floor—a legal minimum on the price at which a good can be sold o An attempt by the government to maintain prices at other than equilibrium levels o Binding—above equilibrium  A binding price floor causes a surplus o Ex. Minimum Wage—law that dictates the lowest price for labor employer must pay  The supply of workers exceeds the demand, resulting in unemployment  Highly skilled and experienced workers aren’t affected by price floor because their wages are well above the minimum (so not binding)  Teenage labor force  Increase in min. wage raises labor supplied Evaluating Price Controls

Econ 1 o o o

Prices are the result of business and consumer decisions behind supply and demand When policymakers set prices legally, they obscure the natural allocation of resources Price control often aimed at helping the poor—equality

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Other ways to help those in need  Earned income tax credit—government program that supplements the incomes of low-wage workers

Taxes  

Tax incidence—the manner in which the burden of a tax is shared among participants in a market How Taxes on Sellers Affect Market Outcomes o Step 1—does the law affect the supply or demand curve o Step 2—which way does the curve shift Step 3—examine how the shift affects the equilibrium price and quantity Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium o Buyers and sellers share the burden of taxes. Buyer pays more and seller receives less How Taxes on Buyers Affect Market Outcomes o Step 1—how does law affect the demand (not supply) o Step 2—demand shifts down (less) Buyers and sellers share the burden of the tax. The only difference is who sends the money in o Ex. Can Congress Distribute the Burden of a Payroll Tax  Payroll is a tax on a good. The good is labor and price is wage  Whether the tax on sellers or buyers, would end with both paying the tax o Tax depends on supply and demand Elasticity and Tax Incidence o How will the burden of tax be divided  A tax burden falls more heavily on the side of the market that is less elastic o Elastic—respond to change in price—taxed less o o

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The side with fewer alternatives is less willing to leave the market, so it shares a higher burden of the tax Ex. Payroll Tax (again) 

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Supply of labor is less elastic—sellers get more burden of the tax...