ECO 201 Chapter Notes - Chapter 6: Price Ceiling, Price Floor, Economic Equilibrium
6 Nov 2018
School
Department
Course
Professor
Ch. 6: Supply, Demand, and Government Policiesī©
Controls on Pricesī©
āPrice ceilingī©- the legislated maximum price that can be charged for a good.ī©
āMay be:ī©
ā Not bindingī¦°, and the market forces will bring the price to equilibrium if theī©
ceiling is above the equilibrium price.ī©
ā Binding constraintī¦° if the equilibrium price is above the ceiling, which will leadī©
to a shortage (long lines, etc) since quantity demanded would be more thanī©
quantity supplied.ī©
āPrice floorī©- the legislated minimum price that can be charged.ī©
āIf equilibrium price is above floor, it is ī©not bindingī¦° and market forces will move priceī©
to equilibrium.ī©
āIf equilibrium price is below floor, it is a ī©binding constraint ī¦°and a surplus is createdī©
since quantity supplied is greater than quantity demanded.ī©
āWhile price controls may have intended effects (such as helping the poor find affordableī©
housing, making sure wages donāt drop below a minimum), they might also do thing that wereī©
not intended (such as discourage landlords from upgrading buildings, lead to less low-wageī©
workers being employed).ī©
āWage subsidies might be a better way to help the poor so that good housing isnāt unavailableī©
while still giving them enough income.ī©
ī©
Taxesī©
āTax incidenceī©- the manner in which the burden of a tax is shared among participants in aī©
market.ī©
āex) tax on ice cream cones raises cost, so supply curve is shifted since less will be supplied.ī©
āTwo lessons: taxes discourage market activity, buyers and sellers share the burden ofī©
taxes since in the new equilibrium buyers pay more for the good and sellers receive less.ī©ī©
āWe can reverse this example and see that ī©taxes levied on buyers and sellers are equivalentī¦°.ī©
āWhen a good is taxed, buyers and sellers share the burden but rarely equally.ī©
āA. Very elastic supply and inelastic demand -> sellers responsive, buyers not -> priceī©
received by sellers does not fall by much -> sellers bear small burden and buyers large.ī©
āB. tax in market with relatively inelastic supply and very elastic demand -> sellers areī©
not responsive to changes in price, but buyers are very responsive -> price paid byī©
buyers doesnāt rise bby much, but price received by sellers falls -> sellers pay most ofī©
tax.ī©
āTherefore, a tax falls more heavily on the side of the market that is less elastic.ī©
ī©
Document Summary
P(cid:534)i(cid:457)e (cid:457)eili(cid:511)(cid:480) - the le(cid:480)islated (cid:510)a(cid:928)i(cid:510)u(cid:510) p(cid:534)i(cid:457)e that (cid:457)a(cid:511) (cid:456)e (cid:457)ha(cid:534)(cid:480)ed (cid:479)o(cid:534) a (cid:480)ood. Not (cid:487)inding , a(cid:511)d the (cid:510)a(cid:534)ket (cid:479)o(cid:534)(cid:457)es (cid:923)ill (cid:456)(cid:534)i(cid:511)(cid:480) the p(cid:534)i(cid:457)e to e(cid:533)uili(cid:456)(cid:534)iu(cid:510) i(cid:479) the (cid:457)eili(cid:511)(cid:480) is a(cid:456)o(cid:922)e the e(cid:533)uili(cid:456)(cid:534)iu(cid:510) p(cid:534)i(cid:457)e. Binding (cid:488)onst aint i(cid:479) the e(cid:533)uili(cid:456)(cid:534)iu(cid:510) p(cid:534)i(cid:457)e is a(cid:456)o(cid:922)e the (cid:457)eili(cid:511)(cid:480), (cid:923)hi(cid:457)h (cid:923)ill lead to a sho(cid:534)ta(cid:480)e (cid:2486)lo(cid:511)(cid:480) li(cid:511)es, et(cid:457)(cid:2487) si(cid:511)(cid:457)e (cid:533)ua(cid:511)tit(cid:929) de(cid:510)a(cid:511)ded (cid:923)ould (cid:456)e (cid:510)o(cid:534)e tha(cid:511) (cid:533)ua(cid:511)tit(cid:929) supplied. P(cid:534)i(cid:457)e (cid:479)loo(cid:534) - the le(cid:480)islated (cid:510)i(cid:511)i(cid:510)u(cid:510) p(cid:534)i(cid:457)e that (cid:457)a(cid:511) (cid:456)e (cid:457)ha(cid:534)(cid:480)ed. I(cid:479) e(cid:533)uili(cid:456)(cid:534)iu(cid:510) p(cid:534)i(cid:457)e is a(cid:456)o(cid:922)e (cid:479)loo(cid:534), it is not (cid:487)inding a(cid:511)d (cid:510)a(cid:534)ket (cid:479)o(cid:534)(cid:457)es (cid:923)ill (cid:510)o(cid:922)e p(cid:534)i(cid:457)e to e(cid:533)uili(cid:456)(cid:534)iu(cid:510). I(cid:479) e(cid:533)uili(cid:456)(cid:534)iu(cid:510) p(cid:534)i(cid:457)e is (cid:456)elo(cid:923) (cid:479)loo(cid:534), it is a (cid:487)inding (cid:488)onst aint a(cid:511)d a su(cid:534)plus is (cid:457)(cid:534)eated si(cid:511)(cid:457)e (cid:533)ua(cid:511)tit(cid:929) supplied is (cid:480)(cid:534)eate(cid:534) tha(cid:511) (cid:533)ua(cid:511)tit(cid:929) de(cid:510)a(cid:511)ded. Wa(cid:480)e su(cid:456)sidies (cid:510)i(cid:480)ht (cid:456)e a (cid:456)ette(cid:534) (cid:923)a(cid:929) to help the poo(cid:534) so that (cid:480)ood housi(cid:511)(cid:480) is(cid:511)"t u(cid:511)a(cid:922)aila(cid:456)le (cid:923)hile still (cid:480)i(cid:922)i(cid:511)(cid:480) the(cid:510) e(cid:511)ou(cid:480)h i(cid:511)(cid:457)o(cid:510)e. Ta(cid:928) i(cid:511)(cid:457)ide(cid:511)(cid:457)e - the (cid:510)a(cid:511)(cid:511)e(cid:534) i(cid:511) (cid:923)hi(cid:457)h the (cid:456)u(cid:534)de(cid:511) o(cid:479) a ta(cid:928) is sha(cid:534)ed a(cid:510)o(cid:511)(cid:480) pa(cid:534)ti(cid:457)ipa(cid:511)ts i(cid:511) a (cid:510)a(cid:534)ket.
