Chapter 6 - Supply, Demand, and Government Policies Flashcards
Price Ceiling
A government set price - cannot go above this price; a maximum price
Price Floor
A government set price - cannot sell below this price, minimum price
Not Binding
When a price ceiling/floor doesn’t affect the equilibrium, it is not binding.
Binding Constraint
When a price ceiling/floor does affect the equilibrium, it is a binding constraint on the market.
Results of Binding Constraint (Shortage)
When the government imposes a binding price ceiling on a competitive market, shortages arise and firms must rations the scarce goods. These rations are usually not desirable.
Shortages
When price ceilings are instilled the result is usually a shortage. where sellers want to sell less at the regulated price and buyers want to buy more at the regulated price, because of this there isn’t enough for everyone and therefore a shortage happens
Rent Control
The short term solution of rent control is a good thing because it keeps rent low however over time landlords deem it useless to keep up with maintenance, while people are also renting a bunch of places for cheap so altogether in the long run this creates a shortage in the renting market
Effects of Binding Constraint (Surplus)
When the government imposes a floor price that is above equilibrium it is a binding price floor which creates a surplus.
Surplus
A surplus occurs when there is more quantity supplied than demanded. There are no buyers willing to buy at the price of the price ceiling. This creates a surplus of the good (“extra”)
Minimum Wage
Minimum wage can create a surplus of labour. The minimum wage essentially acts as a price floor and this in turn creates a surplus of labour. Because there is so many people willing to work, but not enough places to work it creates unemployment. So minimum wage can be both a good and bad thing.
Earned Income Tax Credit
People who work hard get money from the government to “reward” them. if the money that they get is more than the taxes that they owe they get to keep the extra money.
Tax Incidence
Refers to how a tax burden is dispersed among various people in the economy.
For sellers they might not make sellers pay the tax to prevent them from falling out of competition with other sellers due to their high prices, along with that if a good is elastic thy wont make sellers pay that tax at the risk of losing customers
the government can also have a say on who pays the tex between sellers and buyers.
Taxes
Discourage market activity - when a good is taxed the quantity sold is less
Buyers and sellers share the burden of the tax
Payroll Tax
A payroll tax is levied on both firms and workers but affects workers more. the payroll tax only takes away a certain percentage of the workers paycheque for taxes, while the firm pays workers the same wage with or without the tax
Elasticity Affects Tax Incidence
A tax affects the side that is inelastic
If supply is more elastic, buyers face the burden. The tax is less of a burden for sellers because they can easily find other buyers.
If demand is more elastic, sellers face the burden. The tax is less of a burden to buyers because they have more options for buying.
