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