Ch 6 - Questions for review

Which causes a shortage of a good - a price ceiling or a price floor

A Price Ceiling. Binding . Below equilibrium price

Give an example of a price ceiling, and a price floor

A price ceiling is a legal maximum on the price at which a good can be sold. Examples of price ceiling includes rent contorls, price controls on gasoline in the 1970s, and price ceilings on water during a drought. A price floor is a legal minimum on the price at which a good can be sold. Examples of price floors include the minimum wage and farm price supports. A price ceiling leads to a shortage, if the ceiling is binding because suppliers will not produce enough goods to meet demand. A price floor leads to a surplus, if the floor is binging, because suppliers produce more goods than are demanded.

how does a tax on a good affect the price paid by buyers, the price received by sellers, and the quantity sold?

A tax on a good raises the price buyers pay, lowers the price sellers receive, and reduces the quantity sold.

explain why economists usually oppose controls on prices.

Economists usually oppose controls on prices because prices have the crucial job of coordinating economic activity by balancing demand and supply. When policymakers set controls on prices, they obscure the signals that guide the allocation of society's resources. Furthermore, price controls often hurt those they are trying to help

suppose the government removes a tax on buyers of a good and levies a tax of the same size on sellers of the good. how does this change in tax policy affect the price that buyers pay sellers for this good, the amount buyers are out of pocket including the gas, the amount sellers receive net of the tax, and the quantity of the good sold?

Removing a tax paid by buyers and replacing it with a tax paid by sellers has no effect on the price that buyers pay, the price that sellers receive, and the quantity of the good sold.

what determines how the burden of a tax is divided between buyers and sellers? Why?

The burden of a tax is divided between buyers and sellers depending on the elasticity of demand and supply. Elasticity represents the willingness of buyers or sellers to leave the market, which in turns depends on their alternatives. When a good is taxed, the side of the market with fewer good alternatives cannot easily leave the market and thus bears more of the burden of the tax. Tax imposed who bears the most burden who ever has the most inelastic curve

what mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?

When the price of a good is not allowed to bring supply and demand into equilibrium, some alternative mechanism must allocate resources. If quantity supplied exceeds quantity demanded, so that there is a surplus of a good as in the case of a binding price floor, sellers may try to appeal to the personal biases of the buyers. If quantity demanded exceeds quantity supplied, so that there is a shortage of a good as in the case of a binding price ceiling, sellers can ration the good according to their personal biases, or make buyers wait in line.