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Chapter 6 - Supply, Demand, and Government Policies

by: Erin Payne

Chapter 6 - Supply, Demand, and Government Policies Econ 110

Marketplace > Kansas State University > Economcs > Econ 110 > Chapter 6 Supply Demand and Government Policies
Erin Payne

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About this Document

These notes cover the lectures of Dr. Mohaned Al-Hamdi for the weeks 2/19/16 - 2/22/16 (Weeks 5 & 6).
principles of Macroeconomics
Dr. Al-Hamdi
Class Notes
Macroeconomics, Econ, 110, Chapter, 6, supply, demand, Government, policies
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This 3 page Class Notes was uploaded by Erin Payne on Monday May 9, 2016. The Class Notes belongs to Econ 110 at Kansas State University taught by Dr. Al-Hamdi in Spring 2016. Since its upload, it has received 16 views. For similar materials see principles of Macroeconomics in Economcs at Kansas State University.


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Date Created: 05/09/16
  Week 5 & Week 6  February 19th ­ February 22nd   Spring 201  Chapter 6 Notes  Supply, Demand, and Government Policies    ● Price controls  ○ Usually enacted when policymakers believe that the market price of goods or  service is unfair to buyers or sellers.  ○ Can generate inequities.  ● Taxes  ○ Used to raise revenue for public purposes and to influence market outcomes.  ● Price ceiling  ○ A legal maximum on the price at which a good can be sold.  ○ Ex. NYC Rent  ● Price floor  ○ A legal minimum on the price at which a good can be sold.  ○ Ex. Minimum Wage  ● Both binding only if forces the equilibrium to rise or drop from natural equilibrium point.  ○ (Ex. If equilibrium is above price ceiling, equilibrium ​must be dropped to a point  where could be shortage).  ● ∴“These cause things to not to be as good as could be.”  ● How price ceilings affect market outcomes  ○ Not binding  ■ Set above the equilibrium price.  ■ No effect on the price or quantity sold.  ○ Binding constant  ■ Set below the equilibrium price.  ■ Shortage.  ■ Sellers must ration the scarce goods.  ● Long lines  ● Discrimination according to sellers bias.  ● Markets are usually a good way to organize economic activity  ○ Economist usually oppose price ceilings and price floors.  ○ Prices are not the outcome of some haphazard process.  ○ Prices have the crucial job of balancing supply and demand.  ■ Coordinating economic activity.  ● Governments can sometimes improve market outcomes  ○ Want to use price controls  ■ Because of unfair market outcomes.  ■ Aimed at helping the poor.  Notes Key Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided  y instructor.   Week 5 & Week 6  February 19th ­ February 22nd   Spring 2016  ○ Often hurt those they are trying to help.  ○ Other ways of helping those in need  ■ Rent subsidies.  ■ Wage subsidies.  ● Government use taxes  ○ To raise revenue for public projects.  ■ Roads, schools, and national defense.  ● Tax incidence  ○ Manner in which the burden of a tax is shared among participants in a market.  ● How taxes on sellers affect market outcomes  ○ 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.  ○ Taxes discourage market activity.  ○ Buyers and seller share the burden of tax.  ○ Buyers pay more, are worse off.  ○ Sellers receive less, are worse off.  ■ Get the higher price but pay the tax.  ■ Overall: effective price fall.  ● How taxes on buyers affect market outcomes.  ○ Initial impact on the demand.  ○ Demand curve shifts left.  ○ Lower equilibrium price.  ○ Lower equilibrium quantity.  ○ The tax reduces the size of the market.  ○ Buyers and sellers share the burden of tax.  ○ Sellers get a lower price, are worse off.  ○ Buyers pay a lower market price, are worse off.  ■ Effective price (with tax) rises.  ● Taxes levied on seller and taxes levied on buyers are equivalent.  ○ Wedge between the price that buyers pay and the price that seller receives.  ■ 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.  ● Tax Wedge­​  the difference created from tax in equilibrium price and new taxed price that  the buyer and seller must share paying (either equally or unevenly).  ● Elasticity and tax incidence  Notes Key:Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided by instructor.   Week 5 & Week 6  February 19th ­ February 22nd   Spring 2016  ○ Very elastic supply and relatively inelastic demand.  ■ Sellers bear a small burden of tax.  ■ Buyers bear most of the burden.  ○ Relatively inelastic supply and very elastic demand.  ■ Sellers bear most of the tax burden.  ■ Buyers bear a small burden.  ● 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.  Notes Key: Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided by in tructor.


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