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1、Supply, Demand and Government PoliciesChapter 6Copyright 2001 by Harcourt, Inc.Allrightsreserved.Requestsforpermissiontomakecopiesofanypartoftheworkshouldbemailedto:PermissionsDepartment,HarcourtCollegePublishers,6277SeaHarborDrive,Orlando,Florida32887-6777.Harcourt,Inc.itemsandderiveditemscopyright
2、2001byHarcourt,Inc.Supply, Demand, and Government PoliciesuIn a free, unregulated market system, market forces establish equilibrium prices and exchange quantities.uWhile equilibrium conditions may be efficient, it may be true that not everyone is satisfied. uOne of the roles of economists is to use
3、 their theories to assist in the development of policies.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Price Controls.uAre usually enacted when policymakers believe the market price is unfair to buyers or sellers. uResult in government-created price ceilings and floors. Harcourt,Inc.i
4、temsandderiveditemscopyright2001byHarcourt,Inc.Price Ceilings & Price FloorsPrice Ceiling uA legally established maximum price at which a good can be sold. Price FlooruA legally established minimum price at which a good can be sold.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Price C
5、eilingsTwo 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, leading to a shortage. A Price Ceiling That Is Not Binding.$43Quantity ofIce-CreamCones0
6、Price ofIce-CreamConeDemandSupplyPriceceilingEquilibriumprice100EquilibriumquantityHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.A Price Ceiling That Is Binding.$3Quantity ofIce-CreamCones0Price ofIce-CreamCone2DemandSupplyEquilibriumpricePriceceilingShortage125Quantitydemanded75Quant
7、itysuppliedHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Effects of Price CeilingsA binding price ceiling creates . shortages because QD QS.uExample: Gasoline shortage of the 1970s nonprice rationinguExamples: Long lines, Di
8、scrimination by sellersHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Lines at the Gas PumpIn 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
9、for the long gas lines?Economists blame government regulations that limited the price oil companies could charge for gasoline.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Price Ceiling on Gasoline Is Not Binding.$4P1Quantity ofGasoline0Price ofGasolineQ1DemandSupplyPriceceiling1.
10、 Initially, the price ceiling is not binding.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Price Ceiling on Gasoline Is Binding.P1Quantity ofGasoline0Price ofGasolineQ1DemandS1PriceceilingS22. but when supply falls.P23. the price ceiling becomes binding.4. resulting in a shortage.
11、Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Rent ControluRent controls are ceilings placed on the rents that landlords may charge their tenants.uThe goal of rent control policy is to help the poor by making housing more affordable.uOne economist called rent control “the best way to
12、destroy a city, other than bombing.”Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Rent Control in the Short Run.Quantity ofApartments0Rental Price ofApartmentDemandSupplyControlled rentShortageSupply and demand for apartments are relatively inelasticHarcourt,Inc.itemsandderiveditemsco
13、pyright2001byHarcourt,Inc.Rent Control in the Long Run.Quantity ofApartments0Rental Price ofApartmentDemandSupplyControlled rentShortageBecause the supply and demand for apartments are more elastic.rent control causes a large shortageHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Price
14、 FloorsWhen the government imposes a price floor, two outcomes are possible.uThe price floor is not binding if set below the equilibrium price.uThe price floor is binding if set above the equilibrium price, leading to a surplus. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.A Price Fl
15、oor That Is Not Binding.$3Quantity ofIce-CreamCones0Price ofIce-CreamCone100EquilibriumquantityEquilibriumpriceDemandSupplyPricefloor2A Price Floor That Is Binding.$3Quantity ofIce-CreamCones0Price ofIce-CreamConeEquilibriumpriceDemandSupplyPrice floor$4120Quantitysupplied80QuantitydemandedSurplusHa
16、rcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Effects of a Price FlooruA price floor prevents supply and demand from moving toward the equilibrium price and quantity.uWhen the market price hits the floor, it can fall no furthe
17、r, and the market price equals the floor price. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Effects of a Price FloorA binding price floor causes . . . a surplus because QS QD. nonprice rationing is an alternative mechanism for rationing the good, using discrimination criteria.uExamp
18、les: The minimum wage, Agricultural price supports Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Minimum WageAn 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.Harcourt,Inc.itemsandderi
19、veditemscopyright2001byHarcourt,Inc.The Minimum WageQuantity ofLabor0WageEquilibriumwageLabor demandLabor supplyA Free Labor MarketEquilibriumemploymentHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.MinimumwageThe Minimum WageQuantity ofLabor0WageLabor demandLabor supplyQuantitysupplie
20、dQuantitydemandedLabor surplus(unemployment)A Labor Market with a Minimum WageHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.TaxesGovernments levy taxes to raise revenue for public projects. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.What are some potential impacts of
21、 taxes?uTaxes discourage market activity.uWhen a good is taxed, the quantity sold is smaller. uBuyers and sellers share the tax burden.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.TaxesuTax incidence is the study of who bears the burden of a tax. uTaxes result in a change in market e
22、quilibrium.uBuyers pay more and sellers receive less, regardless of whom the tax is levied on. Impact of a 50 Tax Levied on Buyers.3.00Quantity ofIce-Cream Cones0Price ofIce-CreamCone100D1Supply, S1A tax on buyersshifts the demandcurve downwardby the size ofthe tax ($0.50).D2Copyright2001byHarcourt,
23、Inc.Allrightsreserved3.00Quantity ofIce-Cream Cones0Price ofIce-CreamCone10090$3.30PricebuyerspayD1D2Equilibriumwith taxSupply, S1Equilibrium without taxImpact of a 50 Tax Levied on Buyers.2.80PricesellersreceiveCopyright2001byHarcourt,Inc.AllrightsreservedPricewithouttax Tax ($0.50)Harcourt,Inc.ite
24、msandderiveditemscopyright2001byHarcourt,Inc.What was the impact of tax?uTaxes discourage market activity.uWhen a good is taxed, the quantity sold is smaller. uBuyers and sellers share the tax burden.3.00Quantity ofIce-Cream Cones0Price ofIce-CreamCone10090S1S2Demand, D1Impact of a 50 Tax on Sellers
25、.Price without tax2.80Price sellers receive$3.30Price buyers payEquilibrium without taxCopyright2001byHarcourt,Inc.AllrightsreservedA tax on sellers shifts the supply curve upward by the amount of the tax ($0.50). Tax ($0.50)Equilibriumwith taxHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt
26、,Inc.A Payroll TaxQuantity ofLabor0WageWage without taxLabor demandLabor supplyTax wedgeWage firms payWage workers receiveHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Incidence of TaxuIn what proportions is the burden of the tax divided?uHow do the effects of taxes on sellers com
27、pare to those levied on buyers?The answers to these questions depend on the elasticity of demand and the elasticity of supply.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elastic Supply, Inelastic Demand.Quantity0PriceDemandSupplyTax1. When supply is moreelastic than demand.2. .thein
28、cidence of thetax falls moreheavily onconsumers.3. .than onproducers.Price without taxPrice buyers payPrice sellers receiveHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Inelastic Supply, Elastic Demand.Quantity0PriceDemandSupplyPrice without taxTax1. When demand is moreelastic than su
29、pply.2. .theincidence of the tax falls more heavily on producers.3. .than on consumers.Price buyers payPrice sellers receiveHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.So, how is the burden of the tax divided?The burden of a tax falls more heavily on the side of the market that is l
30、ess elastic.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuPrice controls include price ceilings and price floors.u A price ceiling is a legal maximum on the price of a good or service. An example is rent control.uA price floor is a legal minimum on the price of a good or a ser
31、vice. An example is the minimum wage.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuTaxes are used to raise revenue for public purposes.uWhen the government levies a tax on a good, the equilibrium quantity of the good falls.uA tax on a good places a wedge between the price paid
32、 by buyers and the price received by sellers.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuThe incidence of a tax refers to who bears the burden of a tax.uThe incidence of a tax does not depend on whether the tax is levied on buyers or sellers.uThe incidence of the tax depends
33、 on the price elasticities of supply and demand.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Graphical ReviewA Price Ceiling That Is Not Binding.$43Quantity ofIce-CreamCones0Price ofIce-CreamConeDemandSupplyPriceceilingEquilibriumprice100EquilibriumquantityHarcourt,Inc.itemsandderive
34、ditemscopyright2001byHarcourt,Inc.A Price Ceiling That Is Binding.$3Quantity ofIce-CreamCones0Price ofIce-CreamCone2DemandSupplyEquilibriumpricePriceceilingShortage125Quantitydemanded75QuantitysuppliedHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Harcourt,Inc.itemsandderiveditemscopyr
35、ight2001byHarcourt,Inc.The Price Ceiling on Gasoline Is Not Binding.$4P1Quantity ofGasoline0Price ofGasolineQ1DemandSupplyPriceceiling1. Initially, the price ceiling is not binding.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Price Ceiling on Gasoline Is Binding.P1Quantity ofGaso
36、line0Price ofGasolineQ1DemandS1PriceceilingS22. but when supply falls.P23. the price ceiling becomes binding.4. resulting in a shortage.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Rent Control in the Short Run.Quantity ofApartments0Rental Price ofApartmentDemandSupplyControlled rent
37、ShortageSupply and demand for apartments are relatively inelasticHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Rent Control in the Long Run.Quantity ofApartments0Rental Price ofApartmentDemandSupplyControlled rentShortageBecause the supply and demand for apartments are more elastic.re
38、nt control causes a large shortageHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.A Price Floor That Is Not Binding.$3Quantity ofIce-CreamCones0Price ofIce-CreamCone100EquilibriumquantityEquilibriumpriceDemandSupplyPricefloor2A Price Floor That Is Binding.$3Quantity ofIce-CreamCones0Pri
39、ce ofIce-CreamConeEquilibriumpriceDemandSupplyPrice floor$4120Quantitysupplied80QuantitydemandedSurplusHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Minimum WageQuantity ofLabor0WageEquilibriumwageLabor demandLabor suppl
40、yA Free Labor MarketEquilibriumemploymentHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.The Minimum WageMinimumwageQuantity ofLabor0WageLabor demandLabor supplyQuantitysuppliedQuantitydemandedLabor surplus(unemployment)A Labor Market with a Minimum WageHarcourt,Inc.itemsandderiveditems
41、copyright2001byHarcourt,Inc.Impact of a 50 Tax Levied on Buyers.3.00Quantity ofIce-Cream Cones0Price ofIce-CreamCone100D1Supply, S1A tax on buyersshifts the demandcurve downwardby the size ofthe tax ($0.50).D2Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Impact of a 50 Tax Levied on B
42、uyers.3.00Quantity ofIce-Cream Cones0Price ofIce-CreamCone10090$3.30PricebuyerspayD1D2Equilibriumwith taxSupply, S1Equilibrium without tax2.80PricesellersreceivePricewithouttax Tax ($0.50)Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Impact of a 50 Tax on Sellers.3.00Quantity ofIce-Cr
43、eam Cones0Price ofIce-CreamCone10090S1S2Demand, D1Price without tax2.80Price sellers receive$3.30Price buyers payEquilibrium without taxA tax on sellers shifts the supply curve upward by the amount of the tax ($0.50). Tax ($0.50)Equilibriumwith taxHarcourt,Inc.itemsandderiveditemscopyright2001byHarc
44、ourt,Inc.A Payroll TaxQuantity ofLabor0WageWage without taxLabor demandLabor supplyTax wedgeWage firms payWage workers receiveHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elastic Supply, Inelastic Demand.Quantity0PriceDemandSupplyTax1. When supply is moreelastic than demand.2. .thein
45、cidence of thetax falls moreheavily onconsumers.3. .than onproducers.Price without taxPrice buyers payPrice sellers receiveHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Inelastic Supply, Elastic Demand.Quantity0PriceDemandSupplyPrice without taxTax1. When demand is moreelastic than supply.2. .theincidence of the tax falls more heavily on producers.3. .than on consumers.Price buyers payPrice sellers receive
