© 2007 thomson south-western. controls on prices controls on prices are enacted when …...
TRANSCRIPT
© 2007 Thomson South-Western
CONTROLS ON PRICESControls on Prices are enacted when …
– policymakers believe the market price is unfair to buyers or sellers
© 2007 Thomson South-Western
CONTROLS ON PRICES• Price Ceiling
– A legal maximum on the price at which a good can be sold.
© 2007 Thomson South-Western
A Price Ceiling on Tacos???
Price per Taco Q of Tacos Demanded
Q of Tacos Supplied
1 9 1
2 8 2
3 7 3
4 6 4
5 5 5
6 4 6
7 3 7
8 2 8
9 1 9
10 0 10
© 2007 Thomson South-Western
A Market with a Price Ceiling
Quantity ofTacos
0
Price ofTaco
Demand
Supply
3 PriceceilingShortage
Quantitysupplied
Quantitydemanded
Equilibriumprice
$5
3 5 7Equilibrium Quantity
© 2007 Thomson South-Western
Effects of a Price Ceiling
• Shortages • QD > QS
• Inefficient allocation to consumers• Missed opportunities
• Wasted resourcesOpportunity cost of looking for a taco
• Inefficiently low quality• Taco suppliers ‘cut corners’ on quality
• Black Market • Goods bought and sold illegally
© 2007 Thomson South-Western
CASE STUDY: Lines at the Gas Pump
• Economists blame government regulations that limited the price oil companies could charge for gasoline.
• In 1973, OPEC raised the price of crude oil in world markets. Crude oil is the major input in gasoline, so the higher oil prices reduced the supply of gasoline.
• What was responsible for the long gas lines?
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The Market for Gasoline with a Price Ceiling(b) The Price Ceiling on Gasoline Is Binding
Quantity ofGasoline
0
Price ofGasoline
Demand
S1
S2
Price ceiling
QS
P2
QD
P1
Q1
Shortage
© 2007 Thomson South-Western
CONTROLS ON PRICES
• Price Floor– A legal minimum on the price at which a good
can be sold.
© 2007 Thomson South-Western
A Price Ceiling on Tacos???
Price per Taco Q of Tacos Demanded
Q of Tacos Supplied
1 9 1
2 8 2
3 7 3
4 6 4
5 5 5
6 4 6
7 3 7
8 2 8
9 1 9
10 0 10
© 2007 Thomson South-Western
A Market with a Price Ceiling
Quantity ofTacos
0
Price ofTaco
Demand
Supply
7 Pricefloor
Surplus
Quantitydemanded
Quantitysupplied
Equilibriumprice
$5
3 5 7Equilibrium Quantity
© 2007 Thomson South-Western
Effects of a Price Floor• Surplus
– QS > QD
• Inefficient allocation of sales among sellers– Missed opportunities
• Wasted resources
Government may have to buy surplus• Inefficiently high quality
buyers prefer a lower quality good at a lower price• Inefficiently low quantity
– Fewer people buying tacos so a loss to society• Black Market
– Bribes of seller or government officials
© 2007 Thomson South-Western
CASE STUDY: The Minimum Wage
• An important example of a price floor is the minimum wage.
• Minimum wage laws dictate the lowest price possible for labor that any employer may pay.
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How the Minimum Wage Affects the Labor Market
Quantity ofLabor
Wage
0
Labordemand
LaborSupply
Equilibriumemployment
Equilibriumwage
© 2007 Thomson South-Western
How the Minimum Wage Affects the Labor Market
Quantity ofLabor
Wage
0
LaborSupplyLabor surplus
(unemployment)
Labordemand
Minimumwage
Quantitydemanded
Quantitysupplied
© 2007 Thomson South-Western
Quantity Controls - Quotas
A quota is …
• an upper limit on the quantity of some
good that can be bought or sold.
• usually controlled by a license
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Example: Ocean Caught Salmon Market
What controls how many each salmon boat may catch?
Licenses are allocated.
Total quota limit reached
=
ocean caught salmon season is OVER!!!
© 2007 Thomson South-Western
Costs of Quantity Controls
• Inefficiency – missed opportunities
• Incentives for illegal activities - poaching
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How Taxes on Buyers (and Sellers) Affect Market Outcomes
• Taxes discourage market activity.
• When a good is taxed, the quantity sold is smaller.
• Buyers and sellers share the tax burden.
© 2007 Thomson South-Western
How Taxes on Buyers Affect Market Outcomes
• Elasticity and tax incidence • Tax incidence is the manner in which the burden of
a tax is shared among participants in a market.
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How Taxes on Buyers Affect Market Outcomes
• Elasticity and Tax Incidence• Tax incidence is the study of who bears the burden
of a tax. • Taxes result in a change in market equilibrium.• Buyers pay more and sellers receive less, regardless
of whom the tax is levied on.
© 2007 Thomson South-Western
Figure 6 A Tax on Buyers
Quantity ofIce-Cream Cones
0
Price ofIce-Cream
Cone
Pricewithout
tax
Pricesellersreceive
Equilibrium without taxTax ($0.50)
Pricebuyers
pay
D1
D2
Supply, S1
A tax on buyersshifts the demandcurve downwardby the size ofthe tax ($0.50).
$3.30
90
Equilibriumwith tax
2.803.00
100
© 2007 Thomson South-Western
Figure 7 A Tax on Sellers
2.80
Quantity ofIce-Cream Cones
0
Price ofIce-Cream
Cone
Pricewithout
tax
Pricesellersreceive
Equilibriumwith tax
Equilibrium without tax
Tax ($0.50)
Pricebuyers
payS1
S2
Demand, D1
A tax on sellersshifts the supplycurve upwardby the amount ofthe tax ($0.50).
3.00
100
$3.30
90
© 2007 Thomson South-Western
Elasticity and Tax Incidence
• What was the impact of tax? • Taxes discourage market
activity.• When a good is taxed, the
quantity sold is smaller. • Buyers and sellers share
the tax burden.
© 2007 Thomson South-Western
Figure 8 A Payroll Tax
Quantityof Labor
0
Wage
Labor demand
Labor supply
Tax wedge
Wage workersreceive
Wage firms pay
Wage without tax
© 2007 Thomson South-Western
Elasticity and Tax Incidence
• In what proportions is the burden of the tax divided?
• How do the effects of taxes on sellers compare to those levied on buyers?
• The answers to these questions depend on the elasticity of demand and the elasticity of supply.
© 2007 Thomson South-Western
Figure 9 How the Burden of a Tax Is Divided
Quantity0
Price
Demand
Supply
Tax
Price sellersreceive
Price buyers pay
(a) Elastic Supply, Inelastic Demand
2. . . . theincidence of thetax falls moreheavily onconsumers . . .
1. When supply is more elasticthan demand . . .
Price without tax
3. . . . than on producers.
© 2007 Thomson South-Western
Figure 9 How the Burden of a Tax Is Divided
Quantity0
Price
Demand
Supply
Tax
Price sellersreceive
Price buyers pay
(b) Inelastic Supply, Elastic Demand
3. . . . than onconsumers.
1. When demand is more elasticthan supply . . .
Price without tax
2. . . . theincidence of the tax falls more heavily on producers . . .