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1、,Supply, Demand and Government Policies,Chapter 6,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to: Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,Supply, De
2、mand, 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 t
3、he development of policies.,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.,Price Ceilings & Price Floors,Price Ceiling A legally established maximum price at which a good can be so
4、ld. Price Floor A legally established minimum price at which a good can be sold.,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,
5、 leading to a shortage.,A Price Ceiling That Is Not Binding.,$4,3,Quantity of Ice-Cream Cones,0,Price of Ice-Cream Cone,Demand,Supply,Price ceiling,Equilibrium price,100,Equilibrium quantity,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,A Price Ceiling That Is Binding.,$3,Q
6、uantity of Ice-Cream Cones,0,Price of Ice-Cream Cone,2,Demand,Supply,Equilibrium price,Price ceiling,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Effects of Price Ceilings,A binding price ceiling creates . shortages because QD QS. Example: Gasoline shortage of the 1970s no
7、nprice rationing Examples: Long lines, Discrimination by sellers,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
8、lines?,Economists blame government regulations that limited the price oil companies could charge for gasoline.,The Price Ceiling on Gasoline Is Not Binding.,$4,P1,Quantity of Gasoline,0,Price of Gasoline,Q1,Demand,Supply,Price ceiling,1. Initially, the price ceiling is not binding.,The Price Ceiling
9、 on Gasoline Is Binding.,P1,Quantity of Gasoline,0,Price of Gasoline,Q1,Demand,S1,Price ceiling,S2,3. the price ceiling becomes binding.,Rent Control,Rent controls are ceilings placed on the rents that landlords may charge their tenants. The goal of rent control policy is to help the poor by making
10、housing more affordable. One economist called rent control “the best way to destroy a city, other than bombing.”,Rent Control in the Short Run.,Quantity of Apartments,0,Rental Price of Apartment,Demand,Supply,Controlled rent,Supply and demand for apartments are relatively inelastic,Rent Control in t
11、he Long Run.,Quantity of Apartments,0,Rental Price of Apartment,Demand,Supply,Controlled rent,Because the supply and demand for apartments are more elastic.,rent control causes a large shortage,Price Floors,When the government imposes a price floor, two outcomes are possible. The price floor is not
12、binding if set below the equilibrium price. The price floor is binding if set above the equilibrium price, leading to a surplus.,A Price Floor That Is Not Binding.,$3,Quantity of Ice-Cream Cones,0,Price of Ice-Cream Cone,100,Equilibrium quantity,Equilibrium price,Demand,Supply,Price floor,2,A Price
13、Floor That Is Binding.,$3,Quantity of Ice-Cream Cones,0,Price of Ice-Cream Cone,Equilibrium price,Demand,Supply,Price floor,$4,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Effects of a Price Floor,A price floor prevents supply and demand from moving toward the equilibrium
14、price and quantity. When the market price hits the floor, it can fall no further, and the market price equals the floor price.,Effects of a Price Floor,A binding price floor causes . . . a surplus because QS QD. nonprice rationing is an alternative mechanism for rationing the good, using discriminat
15、ion criteria. Examples: The minimum wage, Agricultural price supports,The Minimum Wage,An important example of a price floor is the minimum wage. Minimum wage laws dictate the lowest price possible for labor that any employer may pay.,The Minimum Wage,Quantity of Labor,0,Wage,Equilibrium wage,Labor
16、demand,Labor supply,A Free Labor Market,Equilibrium employment,Minimum wage,The Minimum Wage,Quantity of Labor,0,Wage,Labor demand,Labor supply,A Labor Market with a Minimum Wage,Taxes,Governments levy taxes to raise revenue for public projects.,What are some potential impacts of taxes?,Taxes discourage market activity. When a good is taxed, the quantity sold is smaller. Buyers and sellers share the tax burde
