Chapter 6 Supply Demand and Gov t Policies Control on Prices price ceiling legal maximum on the price at which a good can be sold price floor legal minimum on the price at which a good can be sold a equilibrium is below the ceiling so it is not binding and has no effect on quantity sold b equilibrium price is above the ceiling so it is a binding constraint shortage of supply buyers who come early get the product sellers could ration product according to personal biases family friends race when the government imposes a binding ceiling price on a competitive market a shortage of the good arises and sellers must ration the scarce goods among the large number of potential buyers a equilibrium price is above the floor the price floor is not binding b equilibrium price is below the floor price floor is a binding constraint binding price floor causes a surplus economists believe that prices are have the job of balancing supply and demand and coordinating economic activity against floors ceilings Taxes tax incidence manner in which the burden of a tax is shared among participants in a market How taxes on Sellers Affect Market Outcomes o Demand curve doesn t change but good is less profitable at every price o Costs are raised so the quantity supplied decreases supply shifts left or upward o Equilibrium price quantity changes market for the product decreases o Taxes discourage market activity buyers pay more for the good and seller receives less How Taxes on Buyers Affect Market Outcomes supply curve is unaffected tax shifts the demand buyers demand a smaller quantity demand curve shift left or downward sellers get a lower price for the product buyers pay a lower market price effective price rises taxes levied on sellers and taxes levied on buyers are equivalent the only difference is WHO sends the money to the gov t Elasticity and Tax Incidence a figure shows a tax in a market with elastic supply and inelastic demand sellers are responsive to changes in the price of the good supply curve is flatter when a tax is imposed price paid by buyers rises substantially buyers bear tax burden b figure shows a tax in a market with inelastic supply and elastic demand buyers are responsive to change in price demand curve is flatter when a tax is imposed price received by sellers falls substantially sellers bear tax burden a tax burden falls more heavily on the side of the market that is less elastic o elasticity measures the willingness of buyers sellers to leave the market when conditions o small elasticity of demand means that buyers do not have good alternatives to consume o small elasticity of supply means that sellers do not have good alternatives to produce this become unfavorable this good good o when the good is taxed the side of the market with fewer alternatives is less willing to leave the market and must bear more tax burden
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