Chapter 6: Saving, Investment, and the Financial System

: Gas is $3/gallon. Supply and demand meet at $3/gallon, this is the equilibrium price. The government imposes a price ceiling of $2/gallon. This means No more than ___ may be charged for a gallon of gas. It is ______than the equilibrium price and ________________ the equilibrium to be reached, this ceiling is therefore _______.

$2 lower does not allow binding

Price elasticity of supply equation

(% change in quantity) / (% change in Price)

Price elasticity of demand equation

(% change in quantity) / (% change in price)

Percentage change in demand price equation

(100) x [(P2 - P1)/((P2+P1)/2)]

Percentage change in supply price equation

(100) x [(P2 - P1)/((P2+P1)/2)]

Percentage change in quantity equation

(100) x [(Q2 - Q1)/((Q2+Q1)/2)]

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. Buyers pay more for the good, and sellers receive less.

When cities prevent landlords from charging market rents, what are the common long-run outcomes?

- The quantity of available rental housing units falls - The quality of rental housing units falls - Nonprice methods of rationing emerge

A $1 per unit tax levied on consumers of a good is equivalent to:

A $1 per unit tax levied on producers of the good

54. Graph - identify graph that demonstrates where the price ceiling is binding (graph on page 115 will be the example on the test): Page 113.

A price ceiling is binding when it is set LOWER than the equilibrium price, meaning the ceiling prevents the market equilibrium price from being reached. EXAMPLE: Gas is $3/gallon. Supply and demand meet at $3/gallon, this is the equilibrium price. The government imposes a price ceiling of $2/gallon. This means NO more than $2 may be charged for a gallon of gas. It is lower than the equilibrium price and does not allow equilibrium to be reached, this ceiling is therefore binding

55. Graph - identify graph that demonstrates where the price floor is binding (graph on page 117 will be the example on the test) Page 117.

A price floor is binding when it is set HIGHER than the equilibrium price, meaning the floor prevents the market equilibrium price from being reached. EXAMPLE: Minimum wage is $8, supply and demand meet at this mark on a graph. This is the equilibrium. The government imposes a price floor on minimum wage. It must now be $12. This is a binding price floor! It is too high to allow the equilibrium to be met!

With payroll taxes the wages paid to workers are _____ and the wages paid by firms are ______.

Decreased (paid to workers) Increased (paid by firms) The tax is paid by the employer, and deducted from the employee. So, the wage received by workers falls, the wage paid by firms rises. Workers & firms share this tax. Payroll tax is a tax on a good. The good is labor, the price is the wage.

rent control

If the price ceiling is below the equilibrium price, then the price floor is binding and the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyers' demands for the good or service must in some way be rationed among sellers.

minimum wage

If the price floor is above the equilibrium price, then the price floor is binding, and the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyers' demands for the good or service must in some way be rationed among sellers.

Intuitively, if demand is _______ _________than supply, then buyers' willingness to pay a higher price exceeds sellers' willingness to accept a lower price. Thus, when the tax is instituted, buyers are less likely than sellers to leave the market, so the burden of the tax falls more heavily ___________. The reverse is true if demand is more elastic than supply.

Less Elastic Buyers

If a tax is imposed on a market with inelastic supply and elastic demand, then:

Sellers will bear most of the burden of the tax

Finding tax burden:

Tax burden refers to the distribution of the tax paid by buyers and sellers. For buyers, the tax burden is the difference between the price paid before the tax and the price paid after the tax. For sellers, the tax burden is the difference between the price received before the tax and the price received after the tax.

What would increase quantity supplied, decrease quantity demanded, and increase the price that consumers pay?

The imposition of a binding price floor

Rent controls lead to a shortage in the housing market and, as a result, landlords have less incentives to maintain their apartments. (T/F)

True

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.

Binding price ceiling

a price ceiling that is set below the equilibrium price. . A binding price ceiling always creates a shortage, but the severity of the shortage may differ between short run and the long run.

Binding price floor

a price floor that is set above the equilibrium price

Suppose the government levies a $1 per unit tax on a product. Which of the following statements is correct? a. If the tax Is imposed on the buyers of the product, the buyers will always bear the greater burden on the tax b. If the tax is imposed on the seller of the product, the sellers will always bear the greater burden of the tax c. How the burden of the tax is shared between the buyer and the seller does not depend on whether the tax is imposed on the buyer or the seller

c. How the burden of the tax is shared between the buyer and the seller does not depend on whether the tax is imposed on the buyer or the seller

Suppose the government levies a $1 per unit tax on a product. Which of the following statements is correct? a. If the tax is imposed on the buyers of the product, the price that buyers pay will rise by $1. b. If the tax is imposed on the seller of the product, the price that the sellers receive will fall by $1. c. Regardless of whether the tax is imposed on the buyer of the product or on the seller of the product, the price that buyers pay will rise by less than $1 and the price that sellers receive will fall less than $1.

c. Regardless of whether the tax is imposed on the buyer of the product or on the seller of the product, the price that buyers pay will rise by less than $1 and the price that sellers receive will fall less than $1.

In which of the following cases would the buyers most likely bear the greater burden of a tax? a. A market in which demand is very elastic and supply is very elastic b. A market in which demand is very elastic and supply is very inelastic c. A market in which demand is very inelastic and supply is very inelastic d. A market in which demand is very inelastic and supply is very elastic

d. A market in which demand is very inelastic and supply is very elastic

The incidence of a tax

depends on the price elasticities of supply and demand. Most of the burden falls on the side of the market that is less elastic because that side of the market cannot respond as easily to the tax by changing the quantity bought or sold

Minimum wage is $8, supply and demand meet at this mark on a graph. This is the ____________. The government imposes a price floor on minimum wage. It must now be $12. This is a ___________ price floor! It is too _______ to allow the equilibrium to be met!

equilibrium binding high

When the government levies a tax on good, the equilibrium quantity of the good:

falls. That is, a tax on a market shrinks the size of the market.

Tax incidence

how the burden of tax is distributed among the various people who make up the economy.

The government imposes price controls when policy makers believe the price of a good or service:

is unfair to the buyer or seller

In general, a tax falls more heavily on the ________ side of the market

less elastic

Price elasticity of demand

measures the buyers' responsiveness to change in price.

Price elasticity of supply

measures the sellers' responsiveness to change in price.

A tax on a good

places a wedge between the price paid by buyers and the price received by sellers. When the market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this sense, buyers and sellers share the tax burden. The incidence of a tax (that is, the division of the tax burden) does not depend on whether the tax is levied on buyers or sellers.

payroll tax

places a wedge between the wage that workers receive and the wage that firms pay. Comparing wages with and without tax, you can see that workers and firms share the tax burden. This division of the tax burden between workers and firms does not depend on whether government levies the tax on workers, levies the tax on firms, or divides the tax equally between the two groups.

Four questions on Tax on Sellers - Figure 6 on page 122 (Hint: you have to find Price before the tax, Price that buyer pays after the tax, Price that seller receives after the tax, Size of the tax).

• Price before the tax o • Price that the buyer pays after the tax o • Price that the seller receives after the tax o • Size of the tax o Size of the tax = price that buyer pays after the tax MINUS the price the seller receives after the tax. Tax Incidence: Final burden of tax born my consumers. NOTE: The burden of tax is split between the buyer and the seller (though not equally).