Beruflich Dokumente
Kultur Dokumente
Government Policies
Chapter 6
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Supply, Demand, and
Government Policies
In a free, unregulated market system,
market forces establish equilibrium prices
and exchange quantities.
While equilibrium conditions may be
efficient, it may be true that not everyone is
satisfied.
One of the roles of economists is to use their
theories to assist in the development of
policies.
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Price Controls...
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Price Ceilings & Price Floors
Price Ceiling
A legally established maximum price at which a
good can be sold.
Price Floor
A legally established minimum price at which a
good can be sold.
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Price Ceilings
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Price of
Ice-Cream
Cone
Supply
$4 Price
ceiling
Equilibrium
price
Demand
0 100 Quantity of
Equilibrium Ice-Cream
quantity Cones
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Equilibrium
price
$3
2 Price
ceiling
Shortage
Demand
0 75 125 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
Effects of Price Ceilings
A binding price ceiling creates ...
shortages because QD > QS.
Example: Gasoline shortage of the
1970s
nonprice rationing
Examples: Long lines, Discrimination
by sellers
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Lines at the Gas Pump
In 1973 OPEC raised the price of
crude oil in world markets. Because
crude oil is the major input used to
make gasoline, the higher oil prices
reduced the supply of gasoline.
1. Initially, Supply
the
price ceiling
is not
binding... $4 Price
ceiling
P1
Demand
0 Quantity of
Q1 Gasoline
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The Price Ceiling on Gasoline Is
Binding...
Price of S2 2. …but
Gasoline when supply
falls...
S1
P2
Price
ceiling
P1 3. …the price
ceiling becomes
4. …resulting binding...
in a shortage.
Demand
0 Quantity of
Q1 Gasoline
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Rent Control
Rent controls are ceilings placed on the
rents that landlords may charge their
tenants.
The goal of rent control policy is to help
the poor by making housing more
affordable.
One economist called rent control “the
best way to destroy a city, other than
bombing.”
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Rent Control in the Short Run...
Rental
Price of
Apartment Supply and
Supply demand for
apartments
are relatively
inelastic
Controlled rent
Shortage
Demand
0 Quantity of
Apartments
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Rent Control in the Long Run...
Rental Because the
Price of supply and
Apartment
demand for
apartments are
more elastic...
Supply
0 Quantity of
Apartments
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Price Floors
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A Price Floor That Is Not Binding...
Price of
Ice-Cream
Cone
Supply
Equilibrium
price
$3
Price
2
floor
Demand
0 100 Quantity of
Equilibrium Ice-Cream
quantity Cones
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$4 Price floor
$3
Equilibrium
price
Demand
0 80 120 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
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.
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Effects of a Price Floor
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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.
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The Minimum Wage
A Free Labor Market
Wage
Labor
supply
Equilibrium
wage
Labor
demand
0 Equilibrium Quantity of
employment Labor
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The Minimum Wage
A Labor Market with a
Wage
Minimum Wage
Labor
Labor surplus supply
(unemployment)
Minimum
wage
Labor
demand
0 Quantity Quantity Quantity of
demanded supplied Labor
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Taxes
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What are some potential
impacts of taxes?
Taxes discourage
market activity.
When a good is taxed,
the quantity sold is
smaller.
Buyers and sellers
share the tax burden.
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Taxes
Tax incidence is the study of who
bears the burden of a tax.
Taxes result in a change in market
equilibrium.
Buyers pay more and sellers receive
less, regardless of whom the tax is
levied on.
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D1
D2
0 100 Quantity of
Ice-Cream Cones
Copyright © 2001 by Harcourt, Inc. All rights reserved
Price
Equilibrium
sellers with tax
receive
D1
D2
0 90 100 Quantity of
Ice-Cream Cones
What was the impact of tax?
Taxes discourage
market activity.
When a good is taxed,
the quantity sold is
smaller.
Buyers and sellers
share the tax burden.
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Price
sellers
receive
Demand, D1
0 90 100 Quantity of
Ice-Cream Cones
A Payroll Tax
Wage
Labor
supply
Wage firms
pay
Wage workers
receive
Labor
demand
0 Quantity of
Labor
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The Incidence of Tax
In what proportions is the burden of
the tax divided?
How do the effects of taxes on sellers
compare to those levied on buyers?
Tax 2. ...the
incidence of the
Price without tax tax falls more
heavily on
Price sellers receive consumers...
3. ...than on Demand
producers.
0 Quantity
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Inelastic Supply, Elastic Demand...
Demand
Price sellers receive 2. ...the
incidence of
the tax falls more
heavily on producers...
0 Quantity
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So, how is the burden of the
tax divided?
The burden of a
tax falls more
heavily on the side
of the market that
is less elastic.
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Summary
Price controls include price ceilings
and price floors.
A price ceiling is a legal maximum on
the price of a good or service. An
example is rent control.
A price floor is a legal minimum on
the price of a good or a service. An
example is the minimum wage.
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Summary
Taxes are used to raise revenue for
public purposes.
When the government levies a tax on a
good, the equilibrium quantity of the
good falls.
A tax on a good places a wedge
between the price paid by buyers and
the price received by sellers.
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Summary
The incidence of a tax refers to who
bears the burden of a tax.
The incidence of a tax does not
depend on whether the tax is levied
on buyers or sellers.
The incidence of the tax depends on
the price elasticities of supply and
demand.
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Graphical
Review
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Price of
Ice-Cream
Cone
Supply
$4 Price
ceiling
Equilibrium
price
Demand
0 100 Quantity of
Equilibrium Ice-Cream
quantity Cones
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Equilibrium
price
$3
2 Price
ceiling
Shortage
Demand
0 75 125 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
The Price Ceiling on Gasoline Is
Not Binding...
Price of
Gasoline
1. Initially, Supply
the
price ceiling
is not
binding... $4 Price
ceiling
P1
Demand
0 Quantity of
Q1 Gasoline
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The Price Ceiling on Gasoline Is
Binding...
Price of S2 2. …but
Gasoline when supply
falls...
S1
P2
Price
ceiling
P1 3. …the price
ceiling becomes
4. …resulting binding...
in a shortage.
Demand
0 Quantity of
Q1 Gasoline
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Rent Control in the Short Run...
Rental
Price of
Apartment Supply and
Supply demand for
apartments
are relatively
inelastic
Controlled rent
Shortage
Demand
0 Quantity of
Apartments
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Rent Control in the Long Run...
Rental Because the
Price of supply and
Apartment
demand for
apartments are
more elastic...
Supply
0 Quantity of
Apartments
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A Price Floor That Is Not Binding...
Price of
Ice-Cream
Cone
Supply
Equilibrium
price
$3
Price
2
floor
Demand
0 100 Quantity of
Equilibrium Ice-Cream
quantity Cones
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$4 Price floor
$3
Equilibrium
price
Demand
0 80 120 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
The Minimum Wage
A Free Labor Market
Wage
Labor
supply
Equilibrium
wage
Labor
demand
0 Equilibrium Quantity of
employment Labor
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The Minimum Wage
A Labor Market with a
Wage
Minimum Wage
Labor
Labor surplus supply
(unemployment)
Minimum
wage
Labor
demand
0 Quantity Quantity Quantity of
demanded supplied Labor
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Impact of a 50¢ Tax Levied on
Buyers...
Price of
Ice-Cream Supply, S1
Cone
D1
D2
0 100 Quantity of
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Impact of a 50¢ Tax Levied on
Buyers...
Price of
Ice-Cream
Cone Supply, S1
Price
buyers
pay $3.30 Equilibrium without tax
Price 3.00 Tax ($0.50)
without 2.80
tax
Price
Equilibrium
sellers with tax
receive
D1
D2
0 90 100 Quantity of
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Impact of a 50¢ Tax on Sellers...
Price of
Ice-Cream
Cone A tax on sellers
Price S2 shifts the
buyers Equilibrium
supply curve
pay with tax
upward by the
$3.30 S1 amount of the
Price 3.00 Tax ($0.50)
tax ($0.50).
without 2.80
tax Equilibrium without tax
Price
sellers
receive
Demand, D1
0 90 100 Quantity of
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A Payroll Tax
Wage
Labor
supply
Wage firms
pay
Wage workers
receive
Labor
demand
0 Quantity of
Labor
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Elastic Supply, Inelastic Demand...
Tax 2. ...the
incidence of the
Price without tax tax falls more
heavily on
Price sellers receive consumers...
3. ...than on Demand
producers.
0 Quantity
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Inelastic Supply, Elastic Demand...
Demand
Price sellers receive 2. ...the
incidence of
the tax falls more
heavily on producers...
0 Quantity
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