ECON 101 Chapter Notes - Chapter 6-7: Demand Curve, Economic Surplus, Price Ceiling
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ECON 101 Full Course Notes
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Not binding: when the price that balances supply and demand is below the ceiling price. Binding constraint: when the equilibrium price is above the price ceiling. When the government imposes a binding price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium, Buyers and sellers share the burden of taxes. In the new equilibrium, buyers pay more for the good, and sellers receive less. Very elastic supply and relatively inelastic demand: sellers are very responsive to changes in the price of the good, whereas buyers are not very responsive. Sellers only bear a small burden where buyers bear most of the burden of the tax. Relatively inelastic supply and very elastic demand: sellers are not very responsive to changes in the price, while buyers are very responsive.
