chapter 6 - supply, demand and government policies Flashcards
consumer surplus formula
value to buyers - amount paid by buyers
producer surplus formula
amount received by sellers - cost to sellers
total surplus
consumer surplus + producer surplus
- total gains from trade in a market
value to buyers - cost to sellers
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 price ceiling
if the price ceiling is above equilbirium price
- has no effect on the price or quantity sold
binding price ceilings
if price ceiling is below the equilibrium price
- prevents market from reaching equilibrium
QUANTITY DEMANDED EXCEEDS QUANTITY SUPPLIED
what do binding price ceilings cause?
shortages
- to react to the shortage, there will be mechanisms for rationing the good
non binding price floor
nothing will happen
binding price floor
surplus of the good (excess supply) because the floor is above the equilbrium
- ex. no one is going to buy stanleys if the price floor is 100 dollars
QUANTIY SUPPLIED EXCEEDS THE QUANTITY DEMANDED
tax incidence
study of how the burden of a tax is distributed among various people in the economy
- how taxes are levied in the economy
who pays the tax in an economy?
buyers and sellers share the burden
- taxes on buyers and sellers are equivalent, but not equal (they are both worse off)
2 most important things about tax incidence
- when a good is taxed the quantity sold is smaller in the new equilibrium and therefore taxes discourage market activity
- buyers and sellers share the tax burden
- in new equilbrium, buyers pay more and sellers receive less
how to determine who is paying more of the tax
whichever entity has the inelastic demand or supply
- basically they are forced to stay in the market
ex. consumers of insulin
