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ECN 104 (388)
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Chapter 6

Chapter 6 and 7

5 Pages
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Department
Economics
Course Code
ECN 104
Professor
Eric Kam

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Chapter 6
Price controls
Price ceiling: a legal maximum on the price of a good service
oIf price ceiling is above the equilibrium price, equilibrium is still acceptable.
(not binding)
oIf the price ceiling is underneath the equilibrium, the price ceiling becomes
the actual price (binding constraint). The shortage will be equal to the
difference between the Qd and the Qs
*in the long run, supply and demand become more price elastic bigger shortage as a
result
Price floor: a legal minimum on the price of a good or service
oIf the price floor is below the equilibrium, the equilibrium is still acceptable
(not binding)
oIf the price floor is above the equilibrium, the price floor because the actual
price (binding constraint). The surplus, wasted resources, will be equal to the
difference between the Qd and the Qs
o
Taxes: The government cant make you pay a specific amount
oTax on buyers shift the demand curve to the left by the amount, while tax on
sellers shifts the supply curve to the left by the amount.
the price on buyers rise
the price on sellers fall
oBased on the equilibrium, the tax represents the gap between Pb and Ps
Tax burden falls more heavily on the side of the market that is less
elastic
Based on the Quantity: the more elastic, the less you pay (vice
versa)
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Description
Chapter 6 Price controls • Price ceiling: a legal maximum on the price of a good service o If price ceiling is above the equilibrium price, equilibrium is still acceptable. (not binding) o If the price ceiling is underneath the equilibrium, the price ceiling becomes the actual price (binding constraint). The shortage will be equal to the d s difference between the Q and the Q *in the long run, supply and demand become more price elastic bigger shortage as a result • Price floor: a legal minimum on the price of a good or service o If the price floor is below the equilibrium, the equilibrium is still acceptable (not binding) o If the price floor is above the equilibrium, the price floor because the actual price (binding constraint). The surplus, wasted resources, will be equal to the difference between the Q and the Q s o • Taxes: The government can’t make you pay a specific amount o Tax on buyers shift the demand curve to the left by the amount, while tax on sellers shifts the supply curve to the left by the amount. the price on buyers rise the price on sellers fall o Based on the equilibrium, the tax represents the gap between P andbP s Tax burden falls more heavily on the side of the market that is less elastic Based on the Quantity: the more elastic, the less you pay (vice versa) www.notesolution.com www.notesolution.com Chapter 7 Welfare economics: the study of how the allocation of resources affects economic well-being SURPLUS ON THE DEMAND CURVE • Willingness to pay: the maximum amount the buyer will pay for that good; how much
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