Supply, Demand, and Government Policies : dntjnv@yahoo.co.in Supply, Demand, and Government Policies D.N.TIWARI
PGT ECONOMICS
JNV BAHRAICH UP
Slide 2 : dntjnv@yahoo.co.in Supply, Demand, and Government Policies
In this chapter you will… : dntjnv@yahoo.co.in Examine the effects of government policies that place a ceiling on prices.
Examine the effects of government policies that place a floor under prices.
Consider how a tax on a good affects the price of the good and the quantity sold.
Learn that taxes levied on buyers and taxes levied on sellers are equivalent.
See how the burden of a tax is split between buyers and sellers. In this chapter you will…
SUPPLY, DEMAND, AND GOVERNMENT POLICIES : dntjnv@yahoo.co.in In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities.
While equilibrium conditions may be efficient, it may be true that not everyone is satisfied.
Hence…market controls!
One of the roles of economists is to use their theories to assist in the development of policies. SUPPLY, DEMAND, AND GOVERNMENT POLICIES
CONTROLS ON PRICES : dntjnv@yahoo.co.in Are usually enacted when policymakers believe the market price is unfair to buyers or sellers.
Result in government-created price ceilings and floors. CONTROLS ON PRICES
Price Ceilings and Price Floors : dntjnv@yahoo.co.in 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. Price Ceilings and Price Floors
How Price Ceiling Affect Market Outcomes : dntjnv@yahoo.co.in When the government imposes a price ceiling (i.e... a legal maximum on the price at which a good can be sold) two outcomes are possible
The price ceiling is not binding.
The price ceiling is a binding constraint on the market, creating Shortages. How Price Ceiling Affect Market Outcomes
Figure 6-1: A Market with a Price Ceiling : dntjnv@yahoo.co.in Quantity of Ice-Cream Cones Price of Ice-Cream Cone (a) A Price Ceiling That is Not Binding (b) A Price Ceiling That is Binding Quantity of Ice-Cream Cones Price of Ice-Cream Cone 0 0 Figure 6-1: A Market with a Price Ceiling
How Price Ceiling Affect Market Outcomes : dntjnv@yahoo.co.in A binding price ceiling creates
Shortages because QD > QS.
Examples: Gasoline shortage of the 1970s, housing shortages with rent controls.
Non-price rationing
Examples: Long lines, discrimination by sellers, black markets. How Price Ceiling Affect Market Outcomes
CASE STUDY: Lines at the Gas Pump : dntjnv@yahoo.co.in In 1973, OPEC raised the price of crude oil in world markets. Crude oil is the major input in gasoline, so the higher oil prices reduced the supply of gasoline.
What was responsible for the long gas lines?
Economists blame government regulations that limited the price oil companies could charge for gasoline. CASE STUDY: Lines at the Gas Pump
Figure 6-2: A Market for Gasoline with a Price Ceiling : dntjnv@yahoo.co.in Quantity of Gasoline Price of Gasoline (a) A Price Ceiling on Gasoline is Not Binding (b) A Price Ceiling on Gasoline is Binding Q1 0 0 Quantity of Gasoline Figure 6-2: A Market for Gasoline with a Price Ceiling
CASE STUDY: Rent Control in the Short Run and Long Run : dntjnv@yahoo.co.in Rent controls are ceilings placed on the rents that landlords may charge their tenants.
The goal of rent control policy is to help the poor by making housing more affordable.
One economist called rent control “the best way to destroy a city, other than bombing.” CASE STUDY: Rent Control in the Short Run and Long Run
Figure 6-3: Rent Control in the Short Run and Long Run : dntjnv@yahoo.co.in Quantity of Apartments Rental Price of Apartment (a) Short Run (Supply and Demand are Inelastic) 0 0 (b) Long Run (Supply and Demand are Elastic) Quantity of Apartments Rental Price of Apartment Figure 6-3: Rent Control in the Short Run and Long Run
How Price Floors Affect Market Outcomes : dntjnv@yahoo.co.in When the government imposes a price floor, two outcomes are possible.
The price floor is not binding if set below the equilibrium price.
The price floor is binding if set above the equilibrium price, leading to a surplus. How Price Floors Affect Market Outcomes
Figure 6-4: A Market with a Price Floor : dntjnv@yahoo.co.in Quantity of Ice-Cream Cones Price of Ice-Cream Cone (a) A Price Floor That is Not Binding (b) A Price Floor That is Binding Quantity of Ice-Cream Cones Price of Ice-Cream Cone 0 0 Figure 6-4: A Market with a Price Floor
How Price Floors Affect Market Outcomes : dntjnv@yahoo.co.in A Binding Price Floor creates. . .
Surpluses (i.e. Quantity Supplied > Quantity Demanded)
Non-Price Rationing - An alternative mechanism for rationing of the good:
Discrimination Criteria
Examples:
Minimum Wage
Agricultural Price Supports How Price Floors Affect Market Outcomes
CASE STUDY: The Minimum Wage : dntjnv@yahoo.co.in An important example of a price floor is the minimum wage. Minimum wage laws dictate the lowest price possible for labor that any employer may pay. CASE STUDY: The Minimum Wage
Figure 6-5: How the Minimum Wage Affects the Labour Market : dntjnv@yahoo.co.in Quantity of Labour Wage (a) A Free Labour Market (b) A Labour Market with a Binding Minimum Wage Quantity of Labour Wage 0 0 Figure 6-5: How the Minimum Wage Affects the Labour Market
TAXES : dntjnv@yahoo.co.in What is the purpose of government- imposed taxes?
To raise government revenues.
To restrict production of a product.
What is an excise tax?
A “per-unit” tax that’s independent of the price of the product. TAXES
TAXES : dntjnv@yahoo.co.in Who pays the tax on a good? The buyer or the seller?
How is the burden of a tax divided between buyer and seller?
When the government levies a tax on a good, the equilibrium quantity of the good falls. The size of the market for that good shrinks, shifting either the demand or supply curve.
Tax incidence: The study of who bears the burden of taxation. TAXES
How Taxes on Buyers (and Sellers) Affect Market Outcomes : dntjnv@yahoo.co.in Taxes discourage market activity.
When a good is taxed, the quantity sold is smaller.
Buyers and sellers share the tax burden. How Taxes on Buyers (and Sellers) Affect Market Outcomes
Figure 6-6: A Tax on Buyers : dntjnv@yahoo.co.in 0 Quantity of Ice-Cream Cone Price of Ice-Cream Cone Figure 6-6: A Tax on Buyers
Figure 6-7: A Tax on Sellers : dntjnv@yahoo.co.in 0 Quantity of Ice-Cream Cone Price of Ice-Cream Cone Figure 6-7: A Tax on Sellers
CASE STUDY: The Burden of a Payroll tax : dntjnv@yahoo.co.in Example: Employment Insurance.
A payroll tax places a wedge between the wage the workers receive and the wage the firm pays. CASE STUDY: The Burden of a Payroll tax
Figure 6-8: A Payroll Tax : dntjnv@yahoo.co.in Quantity of Labour Wage 0 Figure 6-8: A Payroll Tax
Elasticity and Tax incidence : dntjnv@yahoo.co.in Consider a tax levied on sellers of a good. What are the effects of this tax?
How do effects of the tax levied on the seller compare with those of the effects imposed on the buyer?
Depends on Elasticity of Demand and Elasticity of Supply. Elasticity and Tax incidence
Elasticity and Tax incidence : dntjnv@yahoo.co.in The burden of a tax falls on the side of the market with the smaller price elasticity!
The more inelastic the demand and the more elastic the supply results in the consumer paying more of the tax.
The more elastic the demand and the more inelastic the supply results in the supplier paying more of the tax. Elasticity and Tax incidence
Figure 6-9 a): How the Burden of a Tax is Divided. : dntjnv@yahoo.co.in Elastic Supply, Inelastic Demand Quantity Price Figure 6-9 a): How the Burden of a Tax is Divided.
Figure 6-9 b): How the Burden of a Tax is Divided : dntjnv@yahoo.co.in Inelastic Supply, Elastic Demand Quantity Price Figure 6-9 b): How the Burden of a Tax is Divided
Summary : dntjnv@yahoo.co.in Price controls include price ceilings and price floors.
A price ceiling is a legal maximum on the price of a good or service. An example is rent control.
A price floor is a legal minimum on the price of a good or a service. An example is the minimum wage. Summary
Summary : dntjnv@yahoo.co.in Taxes are used to raise revenue for public purposes.
When the government levies a tax on a good, the equilibrium quantity of the good falls.
A tax on a good places a wedge between the price paid by buyers and the price received by sellers. Summary
Summary : dntjnv@yahoo.co.in The incidence of a tax refers to who bears the burden of a tax.
The incidence of a tax does not depend on whether the tax is levied on buyers or sellers.
The incidence of the tax depends on the price elasticities of supply and demand.
The burden tends to fall on the side of the market that is less elastic. Summary
The End : dntjnv@yahoo.co.in The End