ECO 2023 Week 5 - Day 2 Lecture Notes
ECO 2023 Week 5 - Day 2 Lecture Notes Eco 2023
Popular in Principles of Economics: Microeconomics
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This 5 page Class Notes was uploaded by Erika Huber on Wednesday September 21, 2016. The Class Notes belongs to Eco 2023 at University of Florida taught by Mark Rush in Fall 2016. Since its upload, it has received 19 views. For similar materials see Principles of Economics: Microeconomics in Economics at University of Florida.
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Date Created: 09/21/16
9/21/16 ECO 2023 Week 5 – Day 2 Lecture Notes Chapter 6: Government Intervention Two Types of Price Controls 1. Price Ceiling: The government sets the maximum price that is legal. a. In the United States, price ceilings are now used for rents. b. In the past, gasoline was subject to a price ceiling. 2. Price Floor: The government sets the minimum price that is legal. a. In the United States, price floors are now used for many agricultural products. b. The minimum wage is a price floor. Price Ceiling Effects of a rent ceiling 1. Black Markets: Markets in which an otherwise legal good trades at an illegal price. 2. Search: Efforts to find someone from whom to buy or sell a good. Price S = MSC The red triangle is the area of Illegal deadweight loss (DWL) prices Price Ceiling D = MSB Quantity Shortage caused by the price ceiling: more is demanded than is supplied. Setting price ceiling above the equilibrium changes nothing. To have an impact, the price ceiling must be set below the equilibrium. When the price ceiling is below the equilibrium price, it makes the equilibrium price illegal. Any price above the price ceiling is illegal. Usually when we have a shortage, it forces the price higher, but that can’t happen in this case because the price can’t rise above the price ceiling. Price Floor Effects of a minimum wage 1. Illegal Hiring: Some workers and firms will agree to wages lower than the minimum wage. 2. Search: As workers search for jobs, they are unemployed. Setting price floor below the equilibrium changes nothing. To have an impact, the price floor must be set above the equilibrium. When the price floor is above the equilibrium price, it makes the equilibrium price illegal. Any price below the price floor is illegal. How does this effect society? o The group that benefits are unions. Union member is paid a lot more than minimum wage. o 1 union worker = 2 lower-skilled workers; some output union wage = $18/hour minimum wage = $7.50/hour Employer would rather get two low skilled workers But when union lobbies to get minimum wage raised to $10, employer hires union labor. Union labor and lower-skilled labor are substitutes for each other so union wants minimum wage raised so that union members will benefit. Surplus caused by the price The red triangle is the area of floor: more is supplied than is deadweight loss (DWL) demanded. This also causes unemployment in the case of this graph. Wage Labor Demand Price Floor / Minimum wage Illegal Prices Labor Supply Labor / Employment Taxes on Sellers Beers S + Tax Price S = MSC The red triangle is the area of deadweight loss (DWL) $3.50 $3 $2.50 D = MSB Quantity QTAX 50,000 Conclusions: The tax shifts the supply curve upward by the amount of the tax. o The vertical shift = the amount of the tax o A tax decreases societies total surplus. Let’s see how the tax works…and its effect on the price the buyers pay and the price the suppliers receive. Tax Incidence Tax incidence: who actually pays the tax. o The tax incidence depends on the price elasticity of demand and the price elasticity of supply. For a given price elasticity of supply: The larger the price elasticity of demand, the less of the tax the demanders pay. The smaller the price elasticity of demand, the more of the tax the demanders pay. For a given price elasticity of demand: The larger the price elasticity of supply, the less of the tax the suppliers pay. The smaller the price elasticity of supply, the more of the tax the suppliers pay. Elastic S + Tax The red area is the small increase in price Price S = MSC that consumers have to pay because of the tax. The green area is the bigger decreases in amount of money suppliers pay because of the tax. D = MSB Quantity Elasticity of Demand (ED) > Elasticity of Supply (ES) = Demanders pay less = suppliers pay more The more elastic the demand curve, the more the tax falls on the suppliers, because if a product is more elastic, it has more substitutes. So as the price increases because of the tax, demanders will find another substitute and not buy the product so then the suppliers are left to pay the tax. More substitutes = demanders have many more options. Inelastic The green area is the Price big increase in price S = MSC that consumers have to pay because of the tax. The red area is the smaller decreases in amount of money suppliers pay because of the tax. D = MSB Quantity ED < ES = Demanders pay more = suppliers pay less The more inelastic the demand curve, the more the tax falls on the consumers, because if a product is more inelastic, it has less substitutes. So as the price increases because of the tax, demanders will not go to find substitutes and will buy the product, therefore paying more of the tax. Fewer substitutes = demanders only have a few other options.
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