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20 Cards in this Set
- Front
- Back
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Price ceiling
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a legal maximum on the price at which a good can be sold.
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Price Floor
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a legal minimum on the price at which a good can be sold.
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A Market with a Price Ceiling
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In panel (a), the government imposes a price ceiling fo $4. b/c the price ceiling is above the equalibrium price of $3, the price ceiling has no effect, and the market can reach the equalibrium of supply and demand. In this equalibrium, quantity supplied and quantity demanded both equal 100 cones. In panel (b), the government imposes a price ceiling of $2. b/c the price ceiling is below the equalibirium price of $3, the markt price equals $2. At this price, 125 cones are demanded and only 75 are supplied, so there is a shortage of 50 cones.
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The Market for Gasoline with a Price Ceiling.
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Panel (a) shows the gasoline market when the price ceiling is not binding b/c the equalibrium price, P1, is blow the ceiling. Panel (b) shows the gasoline market after an increase in the price of crude oil (an input into making gasoline) shifts the supply curve to the left from S1 to S2. In an unregulated market, the price would have risen from P1 to P2. The price ceiling however, prevents this from happening. At the binding price ceiling, consumers are willing to by Qd, but producers of gasoline are willing to sell only Qs. The difference between quantity demanded and quantity supplied, Qd - Qs, measures the gasoline shortage.
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Rent Control in the Short and the Long Run.
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Panel (a) shows the short-run effects of rent control: b/c the supply and demand for apartments are relatively inelastic, the price ceiling imposed by a rent-control law causes only a small shortage of housing. Panel (b) shows the long-run effects of rent control: b/c the supply and demand for apartments are more elastic, rent control causes a large shortage.
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A Market With a Price Floor
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In panel (a), the gvt imposes a price floor of $2. b/c this is below the equilibrium price of $3, the price floor has no effect. The market price adjusts to balance suplly and demand. At the equalibrium, quantity supplied and quantity demanded both equal 100 cones. In panel (b), the gvt imposes a price floor of $4, which is above the equalibrium price of $3. Therefore, the market price equals $4. b/c 120 cones are supplied @ this price and only 80 are demanded, there is a surplus of 40 cones.
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How the Minimum Wage Affects the Labour Market
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Panel (a) shows a labour market in which teh wage adjusts to balance labour supply & labour demanded. Panel (b) shows the impact of a binding minimum wage is a price floor, it causes a surplus: the quantity of labour supplied exceeds the quantity demanded. The result is unemployment.
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Tax incidence
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the manner in which the burden of a tax is shared among participants in a market.
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A Tax on Buyers
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Wheen a tax of $0.50 is levied on buyers, the demand curve shifts down by $0.50 from D1 to D2. The equalibrium quantity falls from 100 to 90 cones. The price that sellers recieve falls from $3.00 to $2.80. The price that buyers pay (including the tax) rises from $3.00 to $3.30. Even though the tax is levied on buyers, buyers & sellers share the burden of the tax.
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Tax on Sellers
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When a tax of $0.50 is levied on sellers, the supply curve shifts up by $0.50 from S1 to S2. The equalibrium quantity falls from 100 to 90 cones. The price that buyers pay rises from $3.00 to $3.30. The price that sellers recieve (after paying the tax) falls from $3.00 to $2.80. Even though the tax is levied on sellers, buyers and sellers share the burden of the tax.
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How the Burden of a Tax Is Divided.
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In panel (a), the supply curve is elastic, and the demand curve is inelastic. In this case, the price is recieved by sellers falls only slightly, while the price paid by buyers rises substially. Thus, buyers bear most to the burden of the tax. In panel (b), the supply curve is inelastic, and the demand curve is elastic. In this case, the price recieved by sellers falls substantially, while the price paid by buyers rises only slightly. Thus, sellers bear most of the burden of the tax.
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A Payroll Tax
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A payroll tax places a wedge between the wage taht workers recieve and the wage that firms pay. Comparing wages with and without the tax, you can see that workers and firms share the tax burden. This division of the tax burden between workers and firms does not depend on whether the gvt levies the tax on workers, levies the tax on firms, or divides the tax equally between the 2 groups.
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A price ceiling is a legal maximum on the price of a good or service.
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An example is rent control.
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If the price ceiling is below the equalibrium price, the quantity demanded exceeds the quantity supplied.
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b/c of the resulting shortage, sellers must in some way ration the good or service among buyers.
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A price floor is a legal minimum on the price of a good or service.
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An example is the minimum wage.
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If the price floor is above the eqalibrium price, the quantity supplied exceeds the quantity demanded.
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b/c of teh resulting surplus, buyers' demands for the good or service must in some wy be rationed among sellers.
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When the gvt. levies a tax on a good, the equalibrium quantity of the good falls.
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That is, a tax on a market shrinks the size of the market.
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A tax on a good places a wedge between the price paid an by buyers and the price recieved by sellers.
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When the market moves to the new equalibrium, buyers pay more for the good and sellers recieve less for it.
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In this sense, buyers and sellers share the tax burden.
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The incidence of a tax (that is, the division of the tax burden) does not depend on whether the tax is levied on buyers or sellers.
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The incidence of tax depends on the price elasticiticies of supply and demand.
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The burden tends to fall on the side of the market that is less elastic b/c that side of the market can respond less easily to the tax by changing the quantity bought or sold.
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