4. Chapter 6

Question 1

What are the two roles of economists?

Answer 1

Scientists who develop and test theories to explain the world around them
Policy advisors who use their theories to help change the world for the better

Question 2

What is the price ceiling and the price floor?

Answer 2

Price ceiling is a legal maximum on the price at which a good can be sold
Price floor is a legal minimum on the price at which a good can be sold

Question 3

What is the difference in not binding and a binding constraint when the government sets a price ceiling?

Answer 3

If the price ceiling is above the price that balances supply and demand, the price ceiling is not binding
If the price ceiling is below the equilibrium price for supply and demand it is known as a binding constraint
Graphs on page 116
Examples on pages 118 and 119

Question 4

What are taxes used for?

Answer 4

All governments use taxes to raise revenue for public projects, such as roads, schools, and national defence

Question 5

What is tax incidence?

Answer 5

The manner in which the burden of a tax is shared among participants in a market
How the tax is distributed among people who make up the economy

Question 6

How does the tax law affect buyers and sellers? (Use three steps)

Answer 6

1. Decide whether the law affects the supply or demand curve
2. Decide which way the curve shifts
3. Examine how the shift affects the equilibrium

Examples of three steps on ice cream on page 127

Question 7

What are the two lessons of taxes?

Answer 7

1. Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium
2. Buyers and sellers share the burden of taxes. In the new equilibrium, buyers pay more for the good, and sellers receive less
   Taxes on buyers and taxes on sellers are equivalent

Question 8

What is payroll tax?

Answer 8

A tax on the wages that firms pay their workers

Graph on page 129

Question 9

What does it mean when the supply is elastic and the demand is in elastic?

Answer 9

When supply is more elastic than demand the incidence of the tax falls more heavily on consumers than on the producers
Graph page 130

Question 10

What does it mean when the demand is elastic and the supply is inelastic?

Answer 10

When the demand is more elastic than supply the incidence of tax falls more heavily on producers than consumers
Graph page 130

Question 11

What causes a steeper supply curve?

Answer 11

When sellers aren’t very responsive to changes in the price of a good

Question 12

What causes the demand curve to be flatter?

Answer 12

When buyers are very responsive to changes in the price

Question 13

What does elasticity measure?

Answer 13

The willingness of buyers or sellers to leave the market when conditions become unfavourable
Small elasticity means the buyer or seller does not have good alternatives for buying or selling

Question 14

Who general bears the bigger burden of the tax if it can’t be even?

Answer 14

The side of the market with fewer good alternatives is less willing to leave the market and must bear more of the burden of the tax

Question 15

When is there a shortage in price control?

When is there a surplus in price control?

Answer 15

There is a shortage when the price ceiling is below the equilibrium cost and quantity
There is a surplus when the price floor is above the equilibrium price and quantity

Question 16

What are the three type of elasticity on a graph?

Answer 16

1. Greater than one (elastic) has a near horizontal demand or supply curve where a small increase in price causes a large change in supply or demand
2. Equal to one (unitary elasticity)
3. Less than one (inelastic) is where the demand or supply curve is near vertical where a large change in price causes little change in demand or supply

Question 17

What is dead weight loss?

Answer 17

The producer surplus or consumer surplus that disappears when you select a quantity in a graph before the equilibrium quantity
The area that disappears is the line from the quantity you pick to the equilibrium point (triangle)
Consumer surplus above
Producer surplus below