week 5 Flashcards
5 effects of price floors
- surpluses
- loss of gains from trade
- wasteful increases in quality
- misallocation of resources
- deadweight loss
surpluses
binding price floor creates a surplus of labor (i.e. unemployment)
loss of gains from trade
when we have a new legal floor, there is going to be a way smaller new consumer surplus as a result
wasteful increases in quality
higher quality raises cost and reduces the seller profit
- buyer gets higher quality but would prefer the lower prices
- sellers are going to end up wasting product to justify the higher price (having a price floor)
misallocation of resources
price floors misallocate resources by
- allowing high cost firms to operate
- preventing low cost firms from entering the industry
- pricing out suppliers in the market
subsidy
money that is issued without the transfer of a good or a service
commodity tax
a tax on goods
taxes (def.)
income or revenue for the government, used to satisfy govenrnment spending/budget
what will happen if there is a tax on sellers?
the supply curve will shift (its becoming more expensive to supply the good)
what will happen if there is a tax on something that consumers want? e.g. doordashing food
demand will go down, people are going to be buying less if you have a higher incidence of taxes
steeper demand curve?
more inelastic demand
flatter demand curve?
more elastic demand
subsidy points on the graph
TOP - price received by sellers
BOTTOM - price paid by buyers
who bears the burden of the tax with a subsidy?
the more inelastic entities
- they will receive more of the benefit from the subsidy
where is the willingness to pay on a curve?
at the very top of the demand curve
where is the willingness to sell on the curve?
at the very bottom of the supply curve (the intercept)
if the price in the market is higher…
there are going to be more suppliers entering the market
when do you have a producer surplus?
when the price is higher than the willingness to sell your services
