Chapter 6 - Supply, demand, and government policies

Question 1

What is Price Ceiling and Price Floor?

Answer 1

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.

Question 2

What happens when the government imposes a price ceiling on the market?

Answer 2

Two outcomes:
1. the price ceiling is not binding (hold back) on the market and the market price will equal the equilibrium price.

2. The price ceiling is a binding constraint on the market the market price will equal the price ceiling.

Question 3

What happens when the government imposes a price floor on the market?

Answer 3

Two outcomes:
1. The price is not binding on the market and the market price will equal the equilibrium price.

2. The price floor is a binding constraint on the market and the market price will equal the price floor.

Question 4

What occurs when policy makers set prices by legal decree?

Answer 4

They obscure the signals that normally guide the allocation of society’s resources.

Prices have a crucial job of balancing supply and demand and thereby coordinating economic activity.

Question 5

Why do policymakers use price controls?

Answer 5

It is often aimed to help the poor.
Ex:
There are rent-control laws, they try to make housing affordable for everyone.
Minimum wage laws try to help people escape poverty.

Question 6

What is Tax incidence?

Answer 6

The manner in which the burden of a tax is shared among participants in a market.

Question 7

How is the tax burden divided?

Answer 7

Consider the following:

1. A market with very elastic supply and relatively inelastic demand would have a tax burden more towards consumers than producers.
2. A market with relatively inelastic supply and very elastic demand will have a tax incidence more for producers than consumer.s

Question 8

Please Refer to slides for images and understanding graphs with the effects of taxes.

Answer 8

Thank you ;)