Econ Chapter 6 Reading Notes
Econ Chapter 6 Reading Notes ECON 201
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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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