Econ 201 Chapter 6
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Econ 101 Chapter #6 Supply Demand and Govt. Policies Controls on Price: Price Ceiling: Legal, Maximum price on which goods can be sold Price Floor: Minimum, Legal price on which goods can be sold When Govt. enforces a Price Ceiling there are two outcomes possible Not Binding on the market and market equals the price at Equilibrium Price Is Binding Constraint on the market and market price will be same as the Price ceiling When Govt. enforces a Price Floor there are two outcomes Possible Not binding on the market and market will equal to Equilibrium price Binding Constraint for the market and will equal the price floor
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Transcript of Econ 201 Chapter 6
Econ 101Chapter #6Supply Demand and Govt. Policies
Controls on Price:
Price Ceiling: Legal, Maximum price on which goods can be sold Price Floor: Minimum, Legal price on which goods can be sold
When Govt. enforces a Price Ceiling there are two outcomes possible Not Binding on the market and market equals the price at
Equilibrium Price Is Binding Constraint on the market and market price will be
same as the Price ceiling
When Govt. enforces a Price Floor there are two outcomes Possible Not binding on the market and market will equal to
Equilibrium price Binding Constraint for the market and will equal the price floor
Evaluating Price ControlsPrincipals of economy
Markets are usually a good way to organize economic activity
Prices are crucial part of balancing supply and demand and help coordinate economic activity
Policymakers ignore the signals which normally help allocating resources while setting price by legal order
Government can sometime improve market outcome
Prices controls are suppose to help poor o Rent Control Lawso Minimum wage Laws
But usually are not as effective as they are suppose to beTaxesTax Incidence: How Burden of Tax is shared among people in a market
Tax on Buyers and its Affect on Market Outcome:o For example: $0.50 Tax to the govt. for buying icecream cones paid by
the buyers How does it affect the supply curve or demand curve Which way curve shifts How shifts affects the equilibrium
Tax on Sellers and its Affect on Market Outcome:o For example: $0.50 Tax to the govt. for each selling of ice cream cones
paid by the Sellers
Taxes on buyers and taxes on sellers are equal.
Taxes act like a wedge between the price buyer pay and the price sellers receive
The only difference is that who sends the tax to the govt.
Elasticity and Tax Incidence:
The burden of the tax of taxed good is shared by buyers and seller of that good
Only rarely its shared equally
How tax burden is divided: impact of taxing in two markets
Very Elastic Supply VS. Relatively inelastic demand Inelastic Supply VS. Very elastic demand
