eco 6 pow supply demand gov

8/20/2019 ECO 6 Pow Supply Demand Gov

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Copyright © 2004 South-Western

66Supply, Demand, andGovernment Poliies


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Copyright © 2004 South-Western!"homson #earning

Supply, Demand, and GovernmentPolicies

• In a free, unregulated market system, market

forces establish equilibrium prices and

exchange quantities.

• While equilibrium conditions may be efficient,

it may be true that not everyone is satisfied.

• One of the roles of economists is to use their

theories to assist in the development of policies.


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CONTROLS ON PRICES

• Are usually enacted hen policymakers believe

the market price is unfair to buyers or sellers.

• !esult in government"created price ceilings and

floors.


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CONTROLS ON PRICES

• Price Ceiling

• A legal maximum on the price at hich a good can

be sold.

• Price Floor • A legal minimum on the price at hich a good can

be sold.


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Ho Price Ceilin!s "##ect $ar%et Outcomes

• #o outcomes are possible hen the

government imposes a price ceiling$

• #he price ceiling is not binding if set above the

equilibrium price.• #he price ceiling is binding if set below the

equilibrium price, leading to a shortage.


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&i!ure ' " $ar%et it( a Price Ceilin!

Copyright©200 Southestern!"homson #earning

$.% & Prie Ceiling "hat 's )inding

*uantity o+

'e-Cream

Cones

)

Prie o+

'e-Cream

Cone

Demand

Supply

/ Price

ceilin!S(orta!e

01

2uantity

supplied

'/1

2uantity

demanded

E*uili+rium

price

.


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Ho Price Ceilin!s "##ect $ar%et Outcomes

• %ffects of &rice 'eilings

• A binding price ceiling creates

• shortages because () * (+.

• %xample$ asoline shortage of the -/0s

• nonprice rationing

• %xamples$ 1ong lines, discrimination by sellers


9/37Copyright © 2004 South-Western!"homson #earning

• In -/2, O&%' raised the price of crude

oil in orld markets. 'rude oil is the

ma3or input in gasoline, so the higher oil

prices reduced the supply of gasoline.

• What as responsible for the long gas

lines4

C"SE ST3D45 Lines at t(e Gas Pump

• %conomists blame government

regulations that limited the price oilcompanies could charge for

gasoline.


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&i!ure / T(e $ar%et #or Gasoline it( a Price Ceilin!


$a% "he Prie Ceiling on Gasoline 's (ot )inding

*uantity o+

Gasoline

)

Prie o+

Gasoline

'6 Initially,t(e priceceilin!is not+indin! 6 6 6 Price ceilin!

Demand

Supply, S '

P '

Q'


11/37

&i!ure / T(e $ar%et #or Gasoline it( a Price Ceilin!


$.% "he Prie Ceiling on Gasoline 's )inding

*uantity o+

Gasoline

)

Prie o+

Gasoline

Demand

S '

S /

Price ceilin!

QS

-6 6 6 6resultin!in as(orta!e6

.6 6 6 6 t(e price

ceilin! +ecomes+indin! 6 6 6

/6 6 6 6 +ut (ensupply #alls 6 6 6

P /

QD

P '

Q'



C"SE ST3D45 Rent Control in t(e S(ort Runand Lon! Run

• !ent controls are ceilings placed on the rents

that landlords may charge their tenants.

• #he goal of rent control policy is to help the

poor by making housing more affordable.

• One economist called rent control 5the best ay

to destroy a city, other than bombing.6


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&i!ure . Rent Control in t(e S(ort Run and in t(e Lon! Run


$a% /ent Control in the Short /un

$supply and demand are inelasti%

*uantity o+

&partments

)

Supply

Controlled rent

/ental

Prie o+

&partment

Demand

S(orta!e


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&i!ure . Rent Control in t(e S(ort Run and in t(e Lon! Run


$.% /ent Control in the #ong /un

$supply and demand are elasti%

)

/ental

Prie o+

&partment

*uantity o+

&partments

Demand

Supply

Controlled rent

S(orta!e



Ho Price &loors "##ect $ar%et Outcomes

• When the government imposes a price floor,

to outcomes are possible.

• #he price floor is not binding if set below the

equilibrium price.

• #he price floor is binding if set above the

equilibrium price, leading to a surplus.


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&i!ure - " $ar%et it( a Price &loor


$a% & Prie loor "hat 's (ot )inding

*uantity o+

'e-Cream

Cones

)

Prie o+

'e-Cream

Cone

E*uili+rium

*uantity

/

Price

#loor

E*uili+rium

price

Demand

Supply

.

'))


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&i!ure - " $ar%et it( a Price &loor


$.% & Prie loor "hat 's )inding

*uantity o+

'e-Cream

Cones

)

Prie o+

'e-Cream

Cone

Demand

Supply

- Price

#loor

7)

2uantity

demanded

'/)

2uantity

supplied

E*uili+rium

price

Surplus

.




• A price floor prevents supply and demand frommoving toard the equilibrium price and quantity.

• When the market price hits the floor, it can fall no

further, and the market price equals the floor price.




• A binding price floor causes . . .

• a surplus because Q+ * Q).

• nonprice rationing is an alternative mechanism for

rationing the good, using discrimination criteria.• %xamples$ #he minimum age, agricultural price

supports



T(e $inimum 8a!e

• An important example of a price floor is the

minimum age. 7inimum age las dictate

the loest price possible for labor that any

employer may pay.


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&i!ure 1 Ho t(e $inimum 8a!e "##ects t(e La+or $ar%et


*uantity o+

#a.or

Wage

)

La+or demand

La+or Supply

E*uili+riumemployment

E*uili+riuma!e


22/37

&i!ure 1 Ho t(e $inimum 8a!e "##ects t(e La+or $ar%et


*uantity o+

#a.or

Wage

)

La+or SupplyLa+or surplus

9unemployment:

La+or demand

$inimuma!e

2uantitydemanded

2uantitysupplied



T";ES

• overnments levy taxes to raise revenue for

public pro3ects.



Ho Ta



Elasticity and Ta< Incidence

• Tax incidence is the manner in hich the burden of a tax is shared among participants in

a market.




• #ax incidence is the study of ho bears the burden of a tax.

• #axes result in a change in market equilibrium.

• 8uyers pay more and sellers receive less,

regardless of hom the tax is levied on.


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&i!ure > " Ta< on =uyers


*uantity o+

'e-Cream Cones

)

Prie o+

'e-CreamCone

Price

it(out

ta<

Price

sellers

receive

E*uili+rium it(out ta<Ta< 9)61):

Price

+uyers

pay

D'

D/

Supply, S '

" ta< on +uyers

s(i#ts t(e demandcurve donard

+y t(e si?e o#

t(e ta< 9)61):6

.6.)

@)

E*uili+rium

it( ta<

/67).6))

'))


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• What as the impact of tax4• #axes discourage market activity.

• When a good is taxed, the quantity sold is smaller.

• 8uyers and sellers share the tax burden.


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&i!ure 0 " Ta< on Sellers


/67)

*uantity o+

'e-Cream Cones

)

Prie o+

'e-CreamCone

Price

it(out

ta<

Price

sellers

receive

E*uili+rium

it( ta<

E*uili+rium it(out ta<

Ta< 9)61):

Price+uyers

payS '

S /

Demand, D'

" ta< on sellerss(i#ts t(e supply

curve upard

+y t(e amount o#

t(e ta< 9)61):6.6))

'))

.6.)

@)


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&i!ure 7 " Payroll Ta<


*uantity

o+ #a.or

)

Wage

La+or demand

La+or supply

Ta< ed!e

8a!e or%ersreceive

8a!e #irms pay

8a!e it(out ta<


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• In hat proportions is the burden of the taxdivided4

• 9o do the effects of taxes on sellers compare

to those levied on buyers4

• #he ansers to these questions depend on the

elasticity of demand and the elasticity of

supply.


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&i!ure @ Ho t(e =urden o# a Ta< Is Divided


*uantity)

Prie

Demand

Supply

Ta<

Price sellersreceive

Price +uyers pay

$a% 1lasti Supply, 'nelasti Demand

/6 6 6 6 t(e

incidence o# t(e

ta< #alls more

(eavily on

consumers 6 6 6

'6 8(en supply is more elastict(an demand 6 6 6

Price it(out ta<

.6 6 6 6 t(an

on producers6


33/37

&i!ure @ Ho t(e =urden o# a Ta< Is Divided


*uantity)

Prie

Demand

Supply

Ta<

Price sellers

receive

Price +uyers pay

$.% 'nelasti Supply, 1lasti Demand

.6 6 6 6 t(an onconsumers6

'6 8(en demand is more elastic

t(an supply 6 6 6

Price it(out ta<

/6 6 6 6 t(e

incidence o#

t(e ta< #allsmore (eavily

on producers 6 6 6


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+o, ho is the burden of the tax divided4

• #he burden of a tax falls more

heavily on the side of the

market that is less elastic.

EL"STICIT4 "ND T"; INCIDENCE


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Summary

• &rice controls include price ceilings and pricefloors.

• A price ceiling is a legal maximum on the price

of a good or service. An example is rentcontrol.

• A price floor is a legal minimum on the price of

a good or a service. An example is theminimum age.


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Summary

• #axes are used to raise revenue for public purposes.

• When the government levies a tax on a good,

the equilibrium quantity of the good falls.

• A tax on a good places a edge beteen the

price paid by buyers and the price received by

sellers.


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Summary

• #he incidence of a tax refers to ho bears the burden of a tax.

• #he incidence of a tax does not depend on

hether the tax is levied on buyers or sellers.

• #he incidence of the tax depends on the price

elasticities of supply and demand.

• #he burden tends to fall on the side of the

market that is less elastic.

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