Chapter 6: Supply, Demand, and Government Policies. Ch. 6: Supply, Demand, and Government Policies

Transcription

1 Ch. 6: Supply, Demand, and Government Policies

2 Government policies that alter the private market outcome Price controls: Price ceiling: a legal maximum on the price of a good or service. (Rent control in New York City) Price floor: a legal minimum on the price of a good or service. (State and federal minimum wages)

3 Government policies that alter the private market outcome Taxes: The government can make buyers or sellers pay a specific amount on each unit. The effect of price controls and taxes can be shown using our supply and demand framework. How much do cigarettes really cost?

4 Supply and demand for pizza in Laramie. Price of a large pizza Market supply and demand for pizza in Laramie $24 $2 Demand curve Supply curve $16 price $12 $ Quantity of Pizzas Quantity of movies

5 A binding price ceiling, $8, on pizza in Laramie. Price of a large pizza Market supply and demand for pizza in Laramie $24 $2 Demand curve Supply curve $16 price $12 Price ceiling $8 $4 Shortage: quantity demanded exceeds quantity supplied Quantity Quantity supplied Quantity of Pizzas demanded Quantity of movies

6 A non-binding price ceiling on pizza in Laramie. Price of a large pizza $24 $2 Market supply and demand for pizza in Laramie: Laramie municipality imposes a price ceiling of $16 on pizza, what happens to equilibrium? Demand curve Supply curve Price ceiling$16 price $12 $8 $ Quantity of Pizzas Quantity of movies

7 A non-binding price ceiling on pizza in Laramie. Price of a large pizza $24 $2 Price ceiling$16 price $12 Market supply and demand for pizza in Laramie: Laramie municipality imposes a price ceiling of $16 on pizza, what happens to equilibrium? Demand curve Supply curve Nothing! No distortion occurs in equilibrium because the price ceiling is not binding. $8 $ Quantity of Pizzas Quantity of movies

8 Supply and demand for Moscow mules in Laramie. Price of a Moscow mule $5 Demand curve Market supply and demand for Moscow mules in Laramie Supply curve $4 price $3 $2 $ Quantity of Moscow mules Quantity of Moscow mules

9 A binding price floor on Moscow mules in Laramie. Price of a Moscow mule Market supply and demand for Moscow mules in Laramie: UW students are getting too wild and crazy, so Laramie municipality puts a price floor of $5 on Moscow mules, what happens to equilibrium? Demand curve Supply curve $5 $4 price $3 $2 $ Quantity of Moscow mules Quantity of Moscow mules

10 A binding price floor on Moscow mules in Laramie. Price of a Moscow mule Market supply and demand for Moscow mules in Laramie: UW students are getting too wild and crazy, so Laramie municipality puts a price floor of $5 on Moscow mules, what happens to equilibrium? Demand curve Supply curve Price floor $5 $4 Surplus: quantity supplied exceeds quantity demanded. price $3 $2 $1 1 Quantity demanded Quantity Quantity of Moscow mules supplied Quantity of Moscow mules

11 A non-binding price floor on Moscow mules in Laramie. Price of a Moscow mule Market supply and demand for Moscow mules in Laramie: What happens to equilibrium if the price floor is placed at $2? Demand curve Supply curve $5 $4 price $3 Price floor$2 $ Quantity of Moscow mules Quantity of Moscow mules

12 A non-binding price floor on Moscow mules in Laramie. Price of a Moscow mule Market supply and demand for Moscow mules in Laramie: What happens to equilibrium if the price floor is placed at $2? Demand curve Supply curve $5 $4 price $3 Nothing! No distortion occurs in equilibrium because the price ceiling is not binding. Price floor$2 $ Quantity of Moscow mules Quantity of Moscow mules

13 Price controls only cause market distortions if they are binding. A price ceiling is binding if it is set below the market price, while a price floor is binding if it is set above the market price. Price controls can cause distortions because the price may not not ensure that the consumer with the highest valuation of an item will necessarily receive that item. How much are you willing to pay for a 1 pound Rib eye steak?

14 How do price controls (price floors and price ceilings) affect the market for labor? Wage / hour $12 Demand for labor Market supply and demand for labor Supply for labor $1 $8 without price controls $4 9 workers are employed and earn per hour $ Quantity of workers

15 How do price controls (price floors and price ceilings) affect the market for labor? Wage / hour $12 Demand for labor Market supply and demand for labor Supply of labor Min. wage $1 $8 A minimum wage serves as a price floor in the market for labor. $4 $2 without price controls At a price of $1/hour, 15 workers are willing to supply their labor but only 3 jobs are available at that price. What is unemployment? Quantity of workers

16 How do price controls (price floors and price ceilings) affect the market for labor? Wage / hour $12 Demand for labor Market supply and demand for labor 12 unemployed workers Supply of labor Min. wage $1 $8 unemployment A minimum wage serves as a price floor in the market for labor. $4 $2 without price controls At a price of $1/hour, 15 workers are willing to supply their labor but only 3 jobs are available at that price. What is unemployment? Quantity of workers

17 Governments must provide public goods such as national defense and schools that markets do not provide (or under provide) and must generate revenue to pay for them... taxes can generate this revenue.

18 A tax may come in the form of a per-unit fee for all goods or services purchased... what happens if the buyer must incur this tax? Price of cigarettes $12 Demand A tax on cigarettes in the United States: Taxing the buyer of cigarettes Supply $9 $1 tax on buyers Buyers were paying for cigarettes and demanded 1 packs. $ Quantity of cigarettes demanded

19 A tax may come in the form of a per-unit fee for all goods or services purchased... what happens if the buyer must incur this tax? Price of cigarettes $12 New Demand Demand A tax on cigarettes in the United States: Taxing the buyer of cigarettes Supply $9 $1 tax on buyers Buyers were paying for cigarettes and demanded 1 packs. $5 They now pay an additional $1 per pack the market price would have to be $5 for them to still demand 1 packs their demand curve shifts left Quantity of cigarettes demanded

20 A tax may come in the form of a per-unit fee for all goods or services purchased... what happens if the buyer must incur this tax? Price of cigarettes $12 New Demand Demand A tax on cigarettes in the United States: Taxing the buyer of cigarettes Supply $9 $5.5 $5 $1 tax on buyers Once demand adjusts, the new equilibrium price is $5.5.. Buyers pay.5 after the tax ($.5 more than before the tax) and suppliers receive $5.5 after the tax ($.5 less than before the tax)! Buyers and sellers share the burden of the tax! Quantity of cigarettes demanded

21 A tax may come in the form of a per-unit fee for all goods or services purchased... what happens if the seller must incur this tax? Price of cigarettes $12 Demand A tax on cigarettes in the United States: Taxing the seller of cigarettes Supply $7 $1 tax on sellers Sellers were receiving for cigarettes and supplied 1 packs. $ Quantity of cigarettes demanded

22 A tax may come in the form of a per-unit fee for all goods or services purchased... what happens if the seller must incur this tax? Price of cigarettes $12 Demand A tax on cigarettes in the United States: Taxing the seller of cigarettes New Supply Supply $7 $5 $1 tax on sellers Sellers were receiving for cigarettes and supplied 1 packs. They now receive $1 less per pack the market price would have to be $7 for them to still supply 1 packs their supply curve shifts left Quantity of cigarettes demanded

23 A tax may come in the form of a per-unit fee for all goods or services purchased... what happens if the seller must incur this tax? Price of cigarettes $12 Demand A tax on cigarettes in the United States: Taxing the seller of cigarettes New Supply Supply $7.5 $5 $1 tax on sellers Once demand adjusts, the new equilibrium price is $5.5.. Buyers pay.5 after the tax ($.5 more than before the tax) and suppliers receive $5.5 after the tax ($.5 less than before the tax)! Buyers and sellers share the burden of the tax! Quantity of cigarettes demanded

24 Regardless of who the government taxes, the buyers and sellers will share the burden of that tax! Why? Taxing the buyers causes their demand curve to adjust (shift left) to a point that splits the tax. Taxing the suppliers causes their supply curve to adjust (shift left) to a point that splits the tax.