Chapter 6 - Supply, demand and the government policies

Free markets are _________ and ___________ __________ with prices

Impersonal and ration goods

The ________ of tax depends on the price of elastics of supply and demand

Incidence

Price for food is __________

Inelastic

What are biding price ceiling rationing mechanism?

It's unfair. By discrimination, longlines, inefficient (because the good doesn't go tot he buyer who values it most highly).

What is a tax wedge?

The difference between what the buyer pays and the seller received.

What happens when supply is more elastic than demand?

The incidence of the tax falls more heavily on the buyers than on the sellers.

What happens hen demand is more elastic than supply?

The incidence of the tax falls more heavily on the seller than on the buyers

What is a tax incidence?

The manner in which the burden of a tax is shared among participants in a market

Price ceilings are commonly found in the markets for?

gasoline and apartments (rent control)

How do taxes effect buyers and sellers? (3 steps)

1. Decide whether the tax affects the supply or demand curve 2. Decide in which direction does the supply/demand curve shift 3. Examine how the shift affects the equilibrium price and quantity

What are the 3 important rules for taxes?

1. Does not make any difference who pays the tax in equilibrium. It is usually the group with the smallest amount of people because its easier to college money from smaller groups 2. Burden is set on least sensitive (inelastic) to price 3. Taxes reduce quantity sold because price of goods sold goes up and goes down for seller

What are the two lessons learned with taxes?

1. Taxes discourage market activity When a good is taxed, the quantity of the good sold is smaller in the new equilibrium 2. Buyers and sellers share the burden of taxes in the new equilibrium Buyers pay more and sellers receive less either way

What is a price ceiling? - the definition

A legal maximum on the price at which a good can be sold

What is a price floor? - the definition

A legal minimum on the price at which good can be sold

What happens to the goods in a competitive market if there is a binding price ceiling?

A shortage

What happens to goods in a competitive market when there is a binding price floor?

A surplus is created

If the price floor is set _________ the equilibrium price, it is binding. Why?

Above. Because it does not allow the market to reach equilibrium.

If the price ceiling is set _________ the equilibrium price, it not binding. Why?

Above. Because it has no impact on the market because the price can move to equilibrium without any restrictions.

If a tax is collected from the sellers, supply shifts upward by the size of the tax per unit. What does this create as a result?

As a result of the decrease in supply, the quantity sold decreases and the price paid by the buyer increase and the price received by the seller decreases.

If the tax is collected form the buyers, demand shifts downward by the size of the tax per unit. What does this create as a result?

Because of the decrease in deaman, the quanity sold decrease, the price paid by the buyer increases and the price received by the seller decrease.s

If the price ceiling is set ______ the equilibrium price, it is a binding constraint. why?

Below. Because it does not allow the market to reach equilibrium.

If the price floor is set _________ the equilibrium price, it is not binding. Why?

Below. Because it has no impact on the market because the price can move to the equilibrium without restrictions.

If price floor is _________. The equilibrium price, the floor is __________ and the quantity supplied __________ the quantity demanded

Binding Above Exceeds

If the price ceiling is ___________. The equilibrium price is __________ and the quantity demanded ___________ the quantity supplied.

Binding Below Exceeds

In retail sales, the ______ usually pays more of the tax

Buyers

What happens to a demand curve when there is subsidy?

Demand curve shifts up Quantity goes up

Quantity of food is ____________

Elastic

When the government levels a tax on a good, the equilibrium quaintly of that good ___________ and the tax on that market shrinks the size of the market

Falls

A tax burden falls more heavily on the side of the market that is ________________

Less elastic

What are some examples of price ceilings? (3)

Lines at a gas pump Crude oil price rose, which raised the cost of producing gas, which reduced supply... causing a severe shortage Rent control

What happens to quantity and price during a binding price ceiling?

Lower price, smaller quantity

What are some examples of price floors?

Minimum wage which creates a surplus of unemployment Or whenever the price floor is above the equilbirum

What is a good example of a price floor?

Minimum wage. When the wage is set above the market equilibrium wage, the quantity supplies of labor exceeds the quantity demanded.

How do price ceilings affect market outcomes?

Non binding and binding price ceilings

What is subsidy?

Opposite of tax like a rebate

What happens when price celining/floors are removed?

Price and quantity increase and move toward the equilibrium

Buyers get a surplus when there is a ___________

Price ceiling because they are not paying that much

What are the two types of controls on prices?

Price floors and price ceilings

Why do economist usually oppose price ceilings and price floors?

Prices balance out supply and demand curves, when price are set they obscure and harm.

Governments raise taxes to raise ____________

Revenue

What does elasticity mean?

Sensitivity

What happens to a supply curve when there is subsidy?

Supply curve shifts up Quantity goes up

A tax levied on the buyer has the same effect as a tax levied on the sellers? (T/F)

True

What is the equation for buyers surplus?

Value received - price paid

What is a non binding price floor?

When the equilibrium price is above the floor, the floor is not binding.

What exactly is a binding price ceiling?

When the government imposes a price ceiling that is lower than the equilibrium price, the ceiling is binding, because by the law it cannot rise any further than the ceiling price, never getting to the equilibrium.

What exactly is a non binding price ceiling?

When the government imposes the new price which is higher than the original equilibrium price, the price ceiling has no affect on the price or quantity sold.

What is a binding price floor?

When the new price is higher than the equilibrium price, this creates a binding constraint because when the market price hits the floor, it can fall no further.