Econ chapter 6

not binding

- the price that balances supply and demand is below the ceiling -Market forces naturally move the economy to the equilibrium, and the price ceiling has no effect on the price or the quantity sold. -price ceiling is above equilibrium price

The rationing mechanisms that develop under price ceilings

-Long lines are inefficient because they waste buyers' time. - Discrimination according to seller bias is both inefficient (because the good may not go to the buyer who values it most highly) and often unfair.

price ceiling

-a legal maximum on the price at which a good can be sold -keeps the market price below equilibrium -in favor of buyers (usually?)

price floor

-a legal minimum on the price at which a good can be sold -price is kept above equilibrium

long run of rent control

-buyers and sellers of rental housing respond more to market conditions as time passes Supply: landlords respond to low rents by not building new apartments and by failing to maintain existing ones Demand:low rents encourage people to find their own apartments (rather than living with their parents or sharing apartments with roommates) and induce more people to move into the city. supply and demand are more elastic

price floor binding

-original equilibrium price is below the price floor -equilibrium price is the price floor -Qd < Qs , surplus

binding constraint

-the price ceiling is below the equilibrium price -cause quantity supplied and demanded to be different no equilibrium The forces of supply and demand tend to move the price toward the equilibrium price, but when the market price hits the ceiling, it cannot, by law, rise any further. Thus, the market price equals the price ceiling -can cause shortage

example of price ceiling

If the Ice-Cream Eaters are successful in their lobbying, the government imposes a legal maximum on the price at which ice-cream cones can be sold

supply curve is elastic, and the demand curve is inelastic

In this case, the price received by sellers falls only slightly, while the price paid by buyers rises substantially. Thus, buyers bear most of the burden of the tax. sellers are very responsive to changes in the price of the good (so the supply curve is relatively flat), buyers are not very responsive (so the demand curve is relatively steep). the price received by sellers does not fall by much, so sellers bear only a small burden. the price paid by buyers rises substantially, indicating that buyers bear most of the burden of the tax.

he supply curve is inelastic, and the demand curve is elastic.

In this case, the price received by sellers falls substantially, while the price paid by buyers rises only slightly. Thus, sellers bear most of the burden of the tax. sellers are not very responsive to changes in the price (so the supply curve is steeper), buyers are very responsive (so the demand curve is flatter). the price paid by buyers does not rise by much, b price received by sellers falls substantially. sellers bear most of the burden of the tax.

short termm effects of rent control

Landlords have a fixed number of apartments to rent --> cannot adjust this number quickly as market conditions change. the number of people searching for housing in a city may not be highly responsive to rents in the short run because people take time to adjust their housing arrangements -The short-run supply and demand for housing are relatively inelastic.

the rationing mechanism in a free, competitive market is

anyone who wants to pay the market price can get a good. Free markets ration goods with prices.

example of a wage subsidy

earned income tax credit, a government program that supplements the incomes of low-wage workers.

price floor not binding

equilibruim price is above the floor Market forces naturally move the economy to the equilibrium, and the price floor has no effect

: Taxes levied on sellers and taxes levied on buyers are

equivalent.

rent control.

example of a price ceiling is rent control The goal of this policy is to help the poor by making housing more affordable.

rent subsidies

government pays a portion of rent nt subsidies do not reduce the quantity of housing supplied and, therefore, do not lead to housing shortages Rent and wage subsidies cost the government money and, therefore, require higher taxes

When the good is taxed, the side of the market with fewer good alternatives is

less willing to leave the market and, therefore, bears more of the burden of the tax.

small elasticity of supply

llers do not have good alternatives to producing this particular good.

rent control, landlords use various mechanisms to ration housing

long waiting lists. -give preference to tenants without children. -Still others discriminate on the basis of race. -------Sometimes apartments are allocated to those willing to offer under-the-table payments to building superintendents. - bribes bring the total price of an apartment closer to the equilibrium price. landlords lose their incentive to respond to tenants' concerns tenants get lower rents, but they also get lower-quality housing

A small elasticity of demand

means that buyers do not have good alternatives to consuming this particular good.

FICA

n acronym for the Federal Insurance Contributions Act. The federal government uses the revenue from the FICA tax to pay for Social Security and Medicare, the income support and healthcare programs for the elderly. FICA is an example of a payroll tax, which is a tax on the wages that firms pay their workers. In 2015, the total FICA tax for the typical worker was 15.3 percent of earnings.

payroll tax

places a wedge between the wage that firms pay and the wage that workers receive. When a payroll tax is enacted, the wage received by workers falls, and the wage paid by firms rises. Lawmakers can decide whether a tax comes from the buyer's pocket or from the seller's, but they cannot legislate the true burden of a tax. Rather, tax incidence depends on the forces of supply and demand.

minimum wage

price floor is the minimum wage. Minimum-wage laws dictate the lowest price for labor that any employer may pay. if equilibrium labor quantity and wage are under the minimum wage floor, it will result in labor surplus or unemployment the typical study finds that a 10 percent increase in the minimum wage depresses teenage employment by 1 to 3 percent. In interpreting this estimate, note that a 10 percent increase in the minimum wage does not raise the average wage of teenagers by 10 percent.

tax incidence

refers to how the burden of a tax is distributed among the various people who make up the economy

tax on sellers

shifts supply curve to the right it reduces the quantity supplied at every price. The supply curve shifts to the left (or, equivalently, upward). 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. In the new equilibrium, buyers pay more for the good, and sellers receive less.

When the government imposes a binding price ceiling on a competitive market

shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers.

A tax burden falls more heavily on the side of the market

that is less elastic.

When rent control depresses rents below the equilibrium level

the quantity of apartments supplied falls substantially and the quantity of apartments demanded rises substantially. The result is a large shortage of housing.

he wedge between the buyers' price and the sellers' price is

the same regardless of whether the tax is levied on buyers or sellers. In either case, the wedge shifts the relative position of the supply and demand curves.

elasticity measures

the willingness of buyers or sellers to leave the market when conditions become unfavorable.

to display the effect of minimum wage on graph, y axis is ________ and x axis is _________

y = wage x = quantity of labor