Week 6 Lecture Notes
Week 6 Lecture Notes EC 110
Popular in Principles of Microeconomics
Popular in Department
This 5 page Class Notes was uploaded by Matt Owens on Monday March 2, 2015. The Class Notes belongs to EC 110 at University of Alabama - Tuscaloosa taught by Kent O. Zirlott in Spring2015. Since its upload, it has received 181 views.
Reviews for Week 6 Lecture Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 03/02/15
Matt Owens Principles of Microeconomics February 17 2015 Chapter 6 Government Policies That Alter the Private Market Outcome Price controls 0 Price Ceiling A legal maximum on the price of a good or service Example Rent control 0 Price Floor A legal minimum on the price of a good or service 0 Taxes Example Minimum wage o The government can make buyers or sellers pay a specific amount on each unit bought sold We will use the supply demand model to see how each policy affects the market outcome the price buyers pay the price sellers receive and equilibrium quantity Example 1 The Market for Apartments Equilibrium without price controls Rental P S price of apts 800 r D Q 300 Quantity of apartments How Price Ceilings Affect Market Outcomes A price ceiling above the equilibrium price is not binding has no effect on the market outcome The equilibrium price 800 is above the ceiling and therefore illegal The ceiling is a binding constraint on the price causes a shortage 1000 800 In the long run supply and demand are more priceelastic Price ceiling 300 800 w 500 Price ceiling D shortage 250 400 Q So the shortage is larger Gets worse because nobody wants to come into the market 0 Incentives are taken away Shortages and Rationing With a shortage sellers must ration the goods among buyers Some rationing mechanisms 0 1 Long lines o 2 Discrimination according to sellers biases These mechanisms are often unfair and 3 Steps for Test Questions With Graphs inefficient the goods do not necessarily go to the buyers who value them most highly Step 1 Draw the bar In contrast when prices are not controlled the Step 2 IS this binding or not binding rationing mechanism is efficient the goods go Step 3 Find the Shortage or the surplus to the buyers that value them most highly and impersonal and thus fair Example 2 The Market for Unskilled Labor Equilibrium without price controls D L 500 Quantity of How Price Floors Affect Market Outcomes 3 A price oor below the equilibrium price is not binding has no effect on the market outcome Price 3 oor D L 500 labor W surplus 3 The equilibrium wage 4 is below the oor and therefor 5 O illegal The oor is a binding constraint on the wage causes a 4 surplus ie unemployment The Minimum Wage unemp Min Minimum wage laws do not affect highly skilled workers wage They do affect teen workers Studies A 10 increase in the minimum wage raises teen unemployment by 13 400 550 Evaluating Price Controls Recall one of the Ten Principles from Chapter 1 0 Markets are usually a good way to organize economic activity Prices are the signals that guide the allocation of society s resources This allocation is altered when policymakers restrict prices Price controls often intended to help the poor but often hurt more than help Taxes The government levies taxes on many goods and services to raise revenue to pay for national defense public schools etc The government can make buyers or sellers pay the tax 0 Sales Tax Tax on buyers 0 Excise Tax Tax on sellers The tax can be a of the goods price or a specific amount for each unit sold 0 For simplicity we analyze perunit taxes only Example 3 The Market For Pizza Equilibrium 1000 without tax 530 Q A Tax on Buyers ers Effects of a 150 per by unit sales tax on Hence a tax on buyers shifts the D curve left by the amount of P buyers the tax P would have to fall by 150 to make buyers willing to buy same 1000 Tax Q as before quot Eg if P falls from 1000 to 850 buyers still willing to purchase 500 pizzas New Equilibrium 0000 The Incidence of a Tax How the burden of a tax is shared among market participants Q 450 Sellers receive Ps 950 Buyers pay Pc 1100 Difference between them 150 tax In our example 0 0 Buyers pay 100 more Sellers get 050 less A Tax on Sellers The Outcome Is the Same in Both Cases The tax effectively raises sellers costs by 150 per pizza Sellers will supply 500 pizzas only if P rises to 1150 to compensate for this cost increase Hence a tax on sellers shifts the S curve left by the amount of the tax New Equilibrium 0000 The effects on P and Q and the tax incidence are the same whether the tax is imposed on buyers or sellers Q 450 Buyers pay Pc 1100 Sellers receive P5 950 Difference between them 150 tax What matters is o A tax drives a wedge between the price buyers pay and the price sellers receive Effects of a 150 per unit sales tax on p buyers 450 500 Effects of a 1 50 per 583 unit excise tax on sellers rs shifts the Q innnfnffhnfav 500 Effects of a 1 50 per unit excise tax on sellers 82 31 PC 2 Tax PS 950 D 450 D 450 500 Elasticity and Tax Incidence CASE 1 Demand is Inelastic Buyers share P C of tax bUrden Tax Priceifnotax r Sellers share PS of tax burden It s easier for sellers than buyers to leave the market So buyers bear most of the burden of the tax CASE 2 Demand is More Elastic Buyers share of tax burden Price if no tax Po quotquot quotT39z39a39kquot Sellers share of tax burden p quotquotquotquotquot quot s It s easier for buyers than sellers to leave the market Sellers bear most of the burden of the tax
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'