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Econ Chapter 6 Reading Notes

by: Samantha Shea

Econ Chapter 6 Reading Notes ECON 201

Marketplace > Michigan State University > Microeconomics > ECON 201 > Econ Chapter 6 Reading Notes
Samantha Shea

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About this Document

These notes cover the main points from chapter six of the "Principles of Microeconomics" book.
Micro Economics
Professor Liedholm
Class Notes
Microeconomics, Reading, notes, Chapter6
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This 2 page Class Notes was uploaded by Samantha Shea on Tuesday September 27, 2016. The Class Notes belongs to ECON 201 at Michigan State University taught by Professor Liedholm in Fall 2016. Since its upload, it has received 5 views. For similar materials see Micro Economics in Microeconomics at Michigan State University.


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Date Created: 09/27/16
Ch.  6  Reading  Notes Tuesday,  September   27,  20162:06  PM Supply,  Demand,  and  Government  Policies ► Controls  on  Prices • Price  ceiling-­‐ a  legal  maximum  on  the  price  at  which  a  good  can  be  sold • Price  floor-­‐a  legal  minimum  on  the  price  at  which  a  good  can  be  sold How  Price  Ceilings  Affect  Market  Outcomes • When  the  price  that  balances  supply  and  demand  is  below  the  ceiling,  the   ceiling  is  not  binding ○ Market  forces  naturally  move  the  economy  to  the  equilibrium  and  the   price  ceiling  has  no  effect  on  the  price  or  the  quantity  sold • When  the  equilibrium  price  is  above  the  price  ceiling,s ading  ceiling  ib constrainton  the  market • Forces  of  supply  and  demand  move  the  price  toward  the  equilibrium  price  but   only  until  hits  the  ceiling • When  the  government  imposes  a  binding  price  ceiling  on  a  competitive  market,   a  shortage  of  the  good  arises,  and  sellers  must  ration  the  scarce  goods  among   the  large  number  of  potential  buyers ○ Rent  control How  Price  Floors  Affect  Market  Outcomes Price  floors  are  an  attempt  by  the  government  to  maintain  prices  at  other  than   • equilibrium  levels • When  the  equilibrium  price  is  above  the  floor,  the  price  floor  is  not  binding • When  the  equilibrium  price  is  below  the  floor,  the  price  floor  is  a  binding   constraint  on  the  market • A  binding  price  floor  causes  a  surplus ○ Minimum  wage Evaluating  Price  Controls • Markets  are  usually  a  good  way  to  organize  economic  activity • Governments  can  sometimes  improve  market  outcomes ► Taxes • All  governments  use  taxes  to  raise  revenue  for  public  projects ○ Important  policy  instrument ○ Affect  our  lives  in  many  ways   • Tax  incidenc-­‐ the  manner  in  which  the  burden  of  a  tax  is  shared  among   ► Taxes • All  governments  use  taxes  to  raise  revenue  for  public  projects ○ Important  policy  instrument ○ Affect  our  lives  in  many  ways   • Tax  incidenc-­‐ the  manner  in  which  the  burden  of  a  tax  is  shared  among   participants  in  a  market How  Taxes  on  Sellers  Affect  Market  Outcomes • Taxes  discourage  market  activity.  When  a  good  is  taxed,  the  quantity  of  the   good  sold  is  smaller  in  the  new  equilibrium • Buyers  and  sellers  share  the  burden  of  taxes.  In  the  new  equilibrium,  buyers  pay   more  for  the  good,  and  sellers  receive  less. How  Taxes  on  Buyers  Affect  Market  Outcomes • Taxes  levied  on  sellers  and  taxes  levied  on  buyers  are  equivalent Elasticity  ad  Tax  Incidence • A  tax  in  a  market  with  very  elastic  supply  and  relatively  inelastic  demand ○ Sellers  are  very  responsive  to  changes  in  the  price  of  the  good  whereas   buyers  are  not  very  responsive § The  price  received  by  sellers  does  not  fall  much  indicating  the   buyers  bear  most  of  the  burden  of  the  tax • A  tax  in  the  market  with  relatively  inelastic  supply  and  very  elastic  demand ○ Sellers  are  not  very  responsive  to  changes  in  the  price,  whereas  buyers   are  very  responsive   § The  price  paid  by  buyers  does  not  rise  much  so  sellers  bear  the   most  of  the  burden  of  the  tax • A  tax  burden  falls  more  heavily  on  the  side  of  the  market  that  is  less  elastic


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