Chapter 6 Flashcards
Supply, Demand and Government policies
Price ceiling
a legal maximum on the price at which a good can be sold
Price floor
a legal minimum on the price at which a good can be sold
Non-binding
When the government policy (legal price minimum/maximum) has no effect on market outcomes
Binding
When the government policy (legal price minimum/maximum) has effect on market outcomes and causes either surplus or shortage
Binding price ceiling
If the price ceiling is set at below equilibrium point then the price of the good will fall and there will be shortage (low price = high demand and low supply). Market can not come to an equilibrium point as there exists a legal maximum.
Binding price floor
If the price floor is set at above equilibrium point then the price of the good will rise and there will be surplus (higher price = low demand and high supply). Market can not come to an equilibrium point as there exists a legal minimum.
Tax incidence
the manner in which the burden of a tax is shared among participants in a market
Who(supplier or consumer) will be charged the tax on the good depends on the
Elasticity of demand and supply, The side which is more inelastic will have higher burden of the tax
Subsidy
A payment by the government to encourage production or consumption, shifting the supply or demand curve.
Minimum wage
A price floor in the labor market; if set above equilibrium, it can lead to unemployment.
Rent control
A price ceiling placed on rent, often leading to shortages and reduced quality of housing if put below the equilibrium point
Tax on sellers
Shifts the supply curve up by the size of the tax, resulting in a higher equilibrium price and lower equilibrium quantity
Tax on buyers
Shifts the demand curve down by the size of the tax, leading to a lower equilibrium price and quantity.
