Chapter 6 Supply Demand and Government Policies Price Ceiling a legal maximum on the price at which a good can be sold Price Floor a legal minimum on the price at which a good can be sold If the price equilibrium is below the price ceiling the price ceiling is not binding does not affect market outcome If the price equilibrium is above the price ceiling the price ceiling is binding As a result 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 buyer If price equilibrium is above price floor the price floor is not binding If the price equilibrium in below price floor the price floor is binding Rental Control in the Short run and in the Long run Rent control in the short run is inelastic long run is elastic Shortage Quantity demanded quantity supplied If supply and demand are inelastic price ceiling causes little effect but if supply and demand are elastic price ceiling could cause large shortage Can cause sellers to discriminate Market With a Price Floor If equilibrium is above price floor there s no effect If equilibrium price is below price floor there is going to be more supply than demand causing a surplus How Minimum Wage Affects Labor Market If minimum wage is above equilibrium it cause unemployment Could affect quantity supplied and labor demanded encourage dropouts of school Tax Incidence the manner in which burdens of a tax is shared among buyers and sellers in a market Tax A tax on sellers Taxes discourage market activity 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 A Tax on buyers Taxes levied on sellers and taxes levied on buyers are equivalent Elasticity and Tax Incidence Who pays the burden of the tax If the supply is inelastic and demand is elastic seller bear most of the burden of the tax If supply is elastic and demand is inelastic buyer bear most of the burden of the tax