Chapter 6 Definitions Rent Control Laws Puts in place a max rent that landlords may charge tenants Minimum Wage Laws Puts in place the lowest wage that firms may pay workers Price Ceiling The legal maximum price that sellers can sell an object How Price Ceilings affect the Market Outcomes Ex Rent Control Government puts price ceiling on Ice Cream Price ceiling 4 per cone Since the equilibrium price is 3 per cone it is below the ceiling Not Binding Can still reach the equilibrium price Price Ceiling 2 per cone Since the equilibrium price is still 3 per cone it is above the ceiling Binding Cannot reach the equilibrium price SHORTAGE Price Floor The legal minimum price that sellers can sell an object Price Floors are attempts by the Government to maintain prices at other than equilibrium levels How Price Floors affect the Market Outcomes Ex Minimum Wage Government puts price floor on Ice Cream Price floor 2 per cone Since the equilibrium price is 3 per cone it is above the price floor Not Binding Can reach equilibrium price Price floor 4 per cone Since equilibrium price is 3 it is below the price floor Binding BINDING PRICE FLOOR CAUSES A SURPLUS Cannot reach equilibrium price Tax Incidence How the burden of a tax is distributed among the various people who make up the economy Three steps in analyzing the supply and demand curve Step 1 Which curve is affected Step 2 Direction of the shift Step 3 Comparing initial equilibrium to new equilibrium If there is a tax placed on buyers of a good for example ice cream Step 1 Which curve is affected The initial impact of the tax is on the demand for ice cream the supply curve is not affected because for any price sellers have the same incentive to provide ice cream for the market The buyers have to pay a tax to the government tax shifts the demand curve for ice cream Step 2 Direction of the shift The tax makes the ice cream less appealing to the buyers making a smaller quantity demanded at every price This shifts the demand curve to the left downward Step 3 Comparing initial equilibrium to new equilibrium The tax on ice cream reduces the size of the ice cream market buyers and sellers Sellers get a lower price for their product buyers pay a lower market price to share the burden of the tax sellers but the effective price rises Elasticity and Tax incidence Taxes discourage market activity When a good is taxed the quantity of the good sold is smaller in the new equilibrium When a good is taxed buyers and sellers of the good share the burden of the tax Buyers pay more and Sellers receive less Only rarely will it be shared equally The difference is the relative elasticity of supply and demand A tax burden falls more heavily on the side of the market that is less elastic When the supply is more elastic than demand the incidence of the tax falls more heavily on consumers than on producers When the demand is more elastic than supply the incidence of the tax falls more heavily on producers than consumers The tax is the HEIGHT between the original and new curve
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