Chapter 6: Supply, Demand, and Government Policies

Question 1

What is a Price Ceiling?

Answer 1

A legal Maximum on the price at which a good can be sold

Question 2

What is considered a binding price ceiling?

Answer 2

When a shortage arises because the equilibrium price is ABOVE the price ceiling
Both curves can’t go ABOVE the price ceiling

Question 3

What is a Price Floor?

Answer 3

A legal Minimum on the price of which a good can be sold

Question 4

What is considered to be a binding price floor?

Answer 4

When a surplus arises because the equilibrium price is BELOW the price floor.
Both curves can’t go BELOW the price floor

Question 5

What effect does taxes have on a market?

Answer 5

Taxes discourage market activity.
When a good is taxed, the quantity sold is SMALLER in the new equilibrium

Question 6

What effect do taxes have on buyers and sellers?

Answer 6

Buyers and sellers share the tax burden most of the time
Buyers pay more and Sellers recieve less

Question 7

What effect does elasticity have on markets and taxes?

Answer 7

Whoever has the MOST ELASTICITY, means the tax burden falls on them.
Whoever has the LEAST ELASTICITY, means the tax burden doesn’t fall on them