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
