Principles of economics 2nd by mankiw chapter 06

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Supply, Demand and Government Policies Chapter Copyright © 2001 by Harcourt, Inc All rights reserved.   Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777 Supply, Demand, and Government Policies 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 ◆ Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Price Controls ◆ Are usually enacted when policymakers believe the market price is unfair to buyers or sellers ◆ Result in government-created price ceilings and floors Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Price Ceilings & Price Floors Price Ceiling ◆ A legally established maximum price at which a good can be sold Price Floor ◆ A legally established minimum price at which a good can be sold Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Price Ceilings Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price ◆ The price ceiling is binding if set below the equilibrium price, leading to a shortage ◆ Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc A Price Ceiling That Is Not Binding Price of Ice-Cream Cone Supply Price ceiling $4 Equilibrium price Demand 100 Equilibrium quantity Quantity of Ice-Cream Cones Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc A Price Ceiling That Is Binding Price of Ice-Cream Cone Supply Equilibrium price $3 Price ceiling Shortage Demand Quantity of 75 125 Ice-Cream Quantity Quantity Cones supplied demanded Effects of Price Ceilings A binding price ceiling creates … shortages because QD > QS ◆ Example: Gasoline shortage of the 1970s … nonprice rationing ◆ Examples: Long lines, Discrimination by sellers Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Lines at the Gas Pump In 1973 OPEC raised the price of crude oil in world markets Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline What was responsible for the long gas lines? Economists blame government regulations that limited the price oil companies could charge for gasoline Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc The Price Ceiling on Gasoline Is Not Binding Price of Gasoline Initially, the price ceiling is not binding Supply Price ceiling $4 P1 Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Q1 Quantity of Gasoline Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc A Price Ceiling That Is Binding Price of Ice-Cream Cone Supply Equilibrium price $3 Price ceiling Shortage Demand Quantity of 75 125 Ice-Cream Quantity Quantity Cones supplied demanded The Price Ceiling on Gasoline Is Not Binding Price of Gasoline Initially, the price ceiling is not binding Supply Price ceiling $4 P1 Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Q1 Quantity of Gasoline The Price Ceiling on Gasoline Is Binding S2 Price of Gasoline …but when supply falls S1 P2 Price ceiling P1 …the price ceiling becomes binding …resulting in a shortage Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Q1 Quantity of Gasoline Rent Control in the Short Run Rental Price of Apartme nt Supply and demand for apartments are relatively inelastic Supply Controlled rent Shortage Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Apartments Rent Control in the Long Run Rental Price of Apartme nt Because the supply and demand for apartments are more elastic Supply …rent control causes a large shortage Controlled rent Shortage Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Apartments A Price Floor That Is Not Binding Price of Ice-Cream Cone Supply Equilibriu m price $3 Price floor Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Equilibrium Ice-Cream Cones quantity 100 Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc A Price Floor That Is Binding Price of Ice-Cream Cone Supply Surplus $4 Price floor $3 Equilibriu m price Demand 80 120 Quantity Quantity demanded supplied Quantity of Ice-Cream Cones The Minimum Wage Wage A Free Labor Market Labor supply Equilibriu m wage Labor demand Equilibrium employmen t Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Labor The Minimum Wage Wage A Labor Market with a Minimum Wage Labor surplus (unemployment) Labor supply Minimum wage Labor demand Quantity demanded Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity supplied Quantity of Labor Impact of a 50¢ Tax Levied on Buyers Price of Ice-Cream Cone Supply, S1 3.00 A tax on buyers shifts the demand curve downward by the size of the tax ($0.50) D1 D Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc 100 Quantity of Ice-Cream Cones Impact of a 50¢ Tax Levied on Buyers Price of Ice-Cream Cone Price buyers pay Price without tax $3.30 3.00 2.80 Price sellers receive Supply, S1 Equilibrium without tax Tax ($0.50) Equilibrium with tax D1 D2 Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc 90 100 Quantity of Ice-Cream Cones Impact of a 50¢ Tax on Sellers Price of Ice-Cream Cone Price buyers pay Price without tax A tax on sellers shifts S2 the supply curve upward S1 by the amount of the tax ($0.50) Equilibrium without tax Equilibrium with tax $3.30 3.00 Tax 2.80 ($0.50) Price sellers receiv e Demand, D1 Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc 90 100 Quantity of Ice-Cream Cones A Payroll Tax Wage Labor supply Wage firms pay Wage Tax wedge without tax Wage workers receive Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Labor demand Quantity of Labor Elastic Supply, Inelastic Demand Price When supply is more elastic than demand Price buyers pay Supply Tax Price without tax Price sellers receive .the incidence of th tax falls more heavily on consumers .than on Demand producers Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity Inelastic Supply, Elastic Demand When demand is more elastic than supply Price Supply Price buyers pay Price without tax .than on consume Tax Price sellers receive Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Demand .the incidence of the tax falls more heavily on producers Quantity ... curve downward by the size of the tax ($0.50) D1 D 100 Quantity of Ice-Cream Cones Copyright © 2001 by Harcourt, Inc All rights reserved Impact of a 50¢ Tax Levied on Buyers Price of Ice-Cream... derived items copyright © 2001 by Harcourt, Inc Labor demand Quantity of Labor The Incidence of Tax ◆ In what proportions is the burden of the tax divided? ◆ How the effects of taxes on sellers compare... items and derived items copyright © 2001 by Harcourt, Inc Copyright © 2001 by Harcourt, Inc All rights reserved Impact of a 50¢ Tax Levied on Buyers Price of Ice-Cream Cone Supply, S1 3.00 A tax
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