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1、6,Supply, Demand, and Government Policies,Supply, Demand, 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 o
2、f economists is to use their theories to assist in the development of policies.,CONTROLS ON PRICES,Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. Result in government-created price ceilings and floors.,CONTROLS ON PRICES,Price Ceiling A legal maximum o
3、n the price at which a good can be sold. Price Floor A legal minimum on the price at which a good can be sold.,How Price Ceilings Affect Market Outcomes,Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The pri
4、ce ceiling is binding if set below the equilibrium price, leading to a shortage.,Figure 1 A Market with a Price Ceiling,(a) A Price Ceiling That Is Not Binding,Quantity of,Ice-Cream,Cones,0,Price of,Ice-Cream,Cone,Figure 1 A Market with a Price Ceiling,Copyright2003 Southwestern/Thomson Learning,(b)
5、 A Price Ceiling That Is Binding,Quantity of,Ice-Cream,Cones,0,Price of,Ice-Cream,Cone,How Price Ceilings Affect Market Outcomes,Effects of Price Ceilings A binding price ceiling creates shortages because QD QS. Example: Gasoline shortage of the 1970s nonprice rationing Examples: Long lines, discrim
6、ination by sellers,In 1973, OPEC raised the price of crude oil in world markets. Crude oil is the major input in gasoline, so the higher oil prices reduced the supply of gasoline. What was responsible for the long gas lines?,CASE STUDY: Lines at the Gas Pump,Economists blame government regulations t
7、hat limited the price oil companies could charge for gasoline.,Figure 2 The Market for Gasoline with a Price Ceiling,Copyright2003 Southwestern/Thomson Learning,(a) The Price Ceiling on Gasoline Is Not Binding,Quantity of,Gasoline,0,Price of,Gasoline,Figure 2 The Market for Gasoline with a Price Cei
8、ling,Copyright2003 Southwestern/Thomson Learning,(b) The Price Ceiling on Gasoline Is Binding,Quantity of,Gasoline,0,Price of,Gasoline,CASE STUDY: Rent Control in the Short Run and Long Run,Rent controls are ceilings placed on the rents that landlords may charge their tenants. The goal of rent contr
9、ol policy is to help the poor by making housing more affordable. One economist called rent control “the best way to destroy a city, other than bombing.”,Figure 3 Rent Control in the Short Run and in the Long Run,Copyright2003 Southwestern/Thomson Learning,(a) Rent Control in the Short Run,(supply an
10、d demand are inelastic),Quantity of,Apartments,0,Rental,Price of,Apartment,Figure 3 Rent Control in the Short Run and in the Long Run,Copyright2003 Southwestern/Thomson Learning,(b) Rent Control in the Long Run,(supply and demand are elastic),0,Rental,Price of,Apartment,Quantity of,Apartments,How Pr
11、ice Floors Affect Market Outcomes,When the government imposes a price floor, two outcomes are possible. The price floor is not binding if set below the equilibrium price. The price floor is binding if set above the equilibrium price, leading to a surplus.,Figure 4 A Market with a Price Floor,Copyrig
12、ht2003 Southwestern/Thomson Learning,(a) A Price Floor That Is Not Binding,Quantity of,Ice-Cream,Cones,0,Price of,Ice-Cream,Cone,Figure 4 A Market with a Price Floor,Copyright2003 Southwestern/Thomson Learning,(b) A Price Floor That Is Binding,Quantity of,Ice-Cream,Cones,0,Price of,Ice-Cream,Cone,Ho
13、w Price Floors Affect Market Outcomes,A price floor prevents supply and demand from moving toward the equilibrium price and quantity. When the market price hits the floor, it can fall no further, and the market price equals the floor price.,How Price Floors Affect Market Outcomes,A binding price flo
14、or causes . . . a surplus because QS QD. 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.,Figure 5 How the Minimum Wage Affects
15、the Labor Market,Copyright2003 Southwestern/Thomson Learning,Quantity of Labor,Wage,0,Figure 5 How the Minimum Wage Affects the Labor Market,Copyright2003 Southwestern/Thomson Learning,Quantity of Labor,Wage,0,TAXES,Governments levy taxes to raise revenue for public projects.,How Taxes on Buyers (an
16、d Sellers) Affect Market Outcomes,Taxes discourage market activity. When a good is taxed, the quantity sold is smaller. Buyers and sellers share the tax burden.,Elasticity and Tax Incidence,Tax incidence is the manner in which the burden of a tax is shared among participants in a market.,Elasticity and Tax Incidence,Tax incidence
